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I've recently started a company for my photography pursuits and am trying to lay down accounting terms on how will equipment be depreciated to help planning cash flow for sustainable balance sheet.

Perhaps I'm being naive, but I hope the balance sheet would approximately reflect true value of company assets. On the other hand, I would not want to track market value of each item separately, hoping that separating items into categories (e.g. bodies, lenses, flashes, lighting accessories, computer software, computer hardware) and having a depreciation formula for each category would do.

Based on what I've read so far, I'm inclining towards reducing value of bodies 25% a year; flashes and accessories 20% a year; lenses 10% a year. But I could be way off.

How does photographic equipment depreciate over time?

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Doesn't this matter depending on what type of business you incorporate under? Have you tried asking your accountant? I would assume they could provide very good information, as it depends on if the equipment is used for mixed use(personal and business), if you want to use IRS 179, amortize over 5 years(std), etc. I don't have any clue how to even begin reading this: irs.gov/publications/p946/ar02.html#d0e11297 –  dpollitt Jan 18 '12 at 16:47
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@dpollitt I was hoping to do away without an accountant; I can now see how doomed this plan is, thanks :) –  Imre Jan 18 '12 at 16:52
    
That is just me being the peanut gallery, you can ignore me :) I'm sure a more experienced member here can steer you in the right direction! But ultimately to do it right I think you need to consult a professional. –  dpollitt Jan 18 '12 at 17:06
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Here there are official tax rules for this and it does not matter if it is for photo equipment or frying pans :) That is what has to go in the books but your tax account should be the one to consult with. –  Itai Jan 18 '12 at 17:42
    
Zack Arias has a nice video on starting your professional photo business. He says first, get an accountant. youtube.com/watch?v=9l00Ey3n37E The depreciation rules are set by the IRS, and don't have much to do with real world. –  Pat Farrell Mar 28 '13 at 16:51

5 Answers 5

up vote 9 down vote accepted

There are two things here - there's the balance sheet and there's reality:

For the reality part you should plan your cash flow and expenses so you have money for equipment, for example, the top of the line Canon and Nikon DSLRs cost something in the $6000-$7000 range, so if you use them and you replace bodies every 4 years you should make sure to have $7000 per camera extra cash left over every 4 years - depreciation doesn't really comes into play here.

For the balance sheet your government has strict rules about depreciation and if you don't follow them you will get into trouble, those rules that can be simple or extremely complex depending on where you are and how your business is structured - but they generally have absolutely nothing to do with the real market value of used gear.

You have to take care of both aspects, if you don't plan according to your gear replacement schedule with no regard to depreciation you won't have money to replace your gear - and if you don't depreciate your gear strictly according to the rules you can get into really big trouble.

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Good points nir. It sounds like the original poster is maybe looking for more info about how to plan the "reality" part. That might be a good followup question for them. –  dpollitt Jan 18 '12 at 19:00
    
@dpollitt - I'm not a pro photographer so I'm not really qualified to answer how often should a pro replace gear (but I do think that the original poster is highly optimistic, I don't think it's a good idea to plan your expenses around the assumption a lens you use every day will last 10 years) –  Nir Jan 19 '12 at 7:59

I'll take a stab at answering the original question. I'm a photographer, not an accountant, but I do my own taxes. So, I will tell you what I do and you can research it and do as you like. I don't care if this falls under accountant's expertise, by the way, as I am only describing what I do. This is for cameras and lenses that are used for business full-time, with no personal use (how I did it as of tax year 2012):

First, every year I re-read IRS Publication 946 (2012 version at http://www.irs.gov/pub/irs-pdf/p946.pdf ) to refresh myself and check for changes. If you have no patience for it, then definitely hire an accountant and end your quest here. Next, I figure out how many years I will depreciate my equipment, 5 or 7, or in one lump sum (page 32). A lump sum is called a 179 deduction and it's for the year I purchased it. I use the 179 deduction when I want to maximize my deductions for a high-revenue year. Otherwise, I use 5 years. There are two possible conventions for depreciation, mid-quarter and half-year. I use mid-quarter if the total value of all capital equipment I placed in service during the last 3 months of the year is more than 40% the total capital equipment I placed in service for the entire year (page 38, top right, and page 45). I use half-year otherwise. There are three declining methods (page 39, 40, and 44), 200% declining balance (DB), 150% DB, and straight line DB. Straight line is just like it sounds, the same amount every year. Page 40 suggests 200%, so I use that. Next, I carefully read Example 1 on the right side of page 45 for 200% DB and half-year convention for a $1000 capital investment. This is my most likely scenario, and I've only fallen into the mid-quarter method in my first year of business. I plug this into an excel spreadsheet. Another option is to go to page 71, Table A-1 and look at the 5 year depreciation rates for each year and plug those into the excel spreadsheet. Those rates are to be multiplied by the original purchase price. They are: year 1 = 0.2, year 2 = 0.32, year 3 = 0.192, year 4 = 0.1152, year 5 = 0.1152, and year 6 = 0.0576. At tax time, I go into TurboTax and I override the automatic calculation and I plug the depreciation amount manually into the program because for some strange reason TurboTax will automatically use a 7 year 200% DB method. I could be lazy and just let it do what it wants, but I want to use 5 years because that's more to the IRS Publication 946 suggestion than 7 years.

Anyway, this is what I do. It's not that difficult and I suggest doing it even if you hire an accountant because for all you know, the accountant might be using TurboTax's default 7 year depreciation, and this way you will know how long before your equipment is fully depreciated. TurboTax doesn't tell you anything about its method or how many years of depreciation it uses.

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If I had a business that relied heavily on a piece of equipment I would like to have enough money on hand to replace it regardless of the rate of (actual) depreciation. If you plan on an item lasting 5 years it is unlikely that it will last exactly 5 years and there's a chance (and Murphy's Law applies here) that your critical equipment will fail sooner rather than later. I would want to have enough money available to instantly replace the item if needed. Now that you've got that banked away you don't need to worry as much about how often you'll need to have that much money available because it's already available and you can let your own history/experience dictate how often you need to replace items.

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In photography business, it seems to be more common to buy the backup equipment right away. It will help you survive during repairs/maintenance, and you won't be out of business until the new equipment ships. –  Imre Jun 12 '12 at 5:27

Lenses don't really have a per year depreciation. It's more about how in tact they are. For instance, I sold a 16-35mm f/2.8 after owning it for a good four years, but because I needed the money and I wanted a quick sale, I sold it off for around 1,600. It initially cost me 2,300 but the current cost is 2,600 because of the earthquake. Meanwhile, I got a 35mm summicron with an M6 for 1,500 total, and I'm going to be selling the lens off for 1,000-1,500, because again, I need the cash. Rule of thumb though - If it's in good condition, try sell it for 66% of what you paid for it/current retail price

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This sounds reasonable. How would you relate it to the business concern? –  mattdm Jun 12 '12 at 2:18

You said:

  • Based on what I've read so far, I'm inclining towards reducing value of
    bodies 25% a year;

    flashes and accessories 20% a year;

    lenses 10% a year.

I'll address "reality" - your accountant and tax man will tell you about the rules.

Your rates are "within the ballpark" but will vary not only with use but with your expectations and where you are positioned in the performance market.

If you want anything like top end performance and/or re working your way up you will probably want to replace bodies every 3 years at most and maybe even less. Consider the performance of 4 year old bodies now. The just-out Nikon D3 was high ISO king, 1ds Mk3 also just released. A 5D Mk1 was 2 years old. The fabulous D700 was 11 months away and not even rumoured. If you had one of those very fine machines then, would you have wanted to change it by now? Maybe not due to the very high performance even by most modern standards. D3 -> D3S or D4? - Maybe.
D3 -> D3x? But an A900 or A77 and ensure the ligt is bright :-). 1DS MKIII -> ... maybe.

BUT also just released then were the Canon 450D, Alpha A350, Pentax K20D and Nikon D300. Anyone who had bought one of those in late 2007 and who wanted reasonably current performance would have very itchy wallet fingers by now. ll have been noticeably improved on in a range of areas.

So - the lower spec cameras probably want replacing more often.

Also at issue is, what happens to the old body? Is it a backup or is it sold? Performance per $ with new DSLRs is always climbing, so that old bodies lose value substantially, but more so cheaper ones than high performance ones. You can still get silly high pries at auction for a D3. Not so an eg Alpha 350.

Similar things happen with lenses. VERY expensive lense are very expensive forever if treated well. A top lens will often increase in value because the new model that is not vast;y dearer is however much more expensive in absolute $ terms. A cheap lens will generally lose value. Good resource are the various enthusiast sites that rate lens performance and also have prices paid listed. For Alpha mount cameras www.dyxum.com is a superb resource. For Canon I know not, but such exist.

Flashes last long unless heavily used or abused, but I'd feel 10 years is too long. Guide numbers do not increase enough to be worthwhile on top flashes and once you have two axis tilt and rotate, high speed multiflash, remote trigger, chaining and a few more bells and whistles, odds are a new top version will not feel like a must have item. If you have a flash that works well for you and use it heavily, you can often pick up a used one with little use once they are "mature". Examples for me ar he Minolta 3600 HSD and 5600 HSD - the latter used to cost and arm and a leg but can now be had for only half an arm in good used condition.

Tripods die in many mysterious ways unless they have magic incantations engraved on them such as "Manfrotto". There are no doubt others which also last forever, but no name tripods or low cost name ones also don't last.

SO

Yes, figures are an OK starting point.
Add the considerations re buy or keep as backup and
have I reached a performance level I am happy with yet?

I want a Nikon D800 (as yet not even named by Nikon) - hoped to be about D3s or D4 in dwarf's body. When I have that I will never NEED another camera until I wear it out. (Want yes,need no). A second one, yes. Some cheap others with fancy niche features? Maybe (eg I met a Surfing photographer a few days ago who had a 1Ds Mk_more but wanted an A77 Sony at 12 frames per second in a waterproof housing for 24 MP surf photos). At that stage the body replace cycle time extends to the length of the 5 year service contract.

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Do you have reasoning behind why you agree with the depreciation rates that were suggested? This is kind of a long rant, and I don't see much substantial evidence to backup your claims. I don't think the final paragraph adds much either. –  dpollitt Jan 19 '12 at 2:58
    
@dpollitt - I re-re-read my answer and it seems to me to adequately address the question, with reasons given in almost all cases. To get to the percentages divide my lifetimes in years into 100. eg 3 years -> 100/3 = 33%. 4 years = 100/4 = 25%. I assume that that is obvious to you, but, as the rest is not, then maybe not. | One only example: I noted that eg a 4 year old Nikon D3 is still very good by most standards but a 4 year old mid range Sony A350 is getting very tired by almost any standards. So 25% is too small for a mid range but OKish at the top end. Does that make sense to you? –  Russell McMahon Jan 20 '12 at 4:41
    
Minor nit: even very expensive lenses become completely obsolete, and can become functionally obsolete a lot sooner than "forever". I have a ton of pre-AI Nikkor lenses from my Nikon F days. They all still work. They will mount only on pro-level Nikon DSLRs, none of the mid or lower bodies will even mount them. And as good as they are, modern lenses have better coatings, better designs, etc. From a real world standpoint, really good lenses probably have a 20 year life. Which is a long time, but not forever. –  Pat Farrell Jun 12 '12 at 0:45

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