How to compute depreciation based on mileage
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Depreciation is defined as the expense associated from using an asset. If your company has an automobile used for business, this automobile needs to be depreciated over time so the company has a good idea of what it cost to actually use the asset.
One of the ways you could depreciate a car is through the use of mileage. This method lowers the value of the vehicle based on the actual mileage driven.
- Depreciation is defined as the expense associated from using an asset.
- One of the ways you could depreciate a car is through the use of mileage.
Write down the actual cost of the vehicle. This is the value you will start at for your depreciation.
Determine how long you will be keeping the car. The age of the vehicle will be one of the factors in determining its salvage value.
Determine the salvage value of the car. Use the Kelley Blue Book Used Car Guide (see Resources) to get an idea of the per cent in value lost over time and condition for the make and model of your car and the period you plan on owning it. If the model has had a long lifespan, do several calculations to get a better picture of what the value of the car might be.
- Determine the salvage value of the car.
- Use the Kelley Blue Book Used Car Guide (see Resources) to get an idea of the per cent in value lost over time and condition for the make and model of your car and the period you plan on owning it.
Plan out how many total miles the car will be driven over the course of the life of the vehicle. Usually this is 12,000 miles per year, but this number can be different based on historical car uses for your company. If you know the cars get driven a lot, use a higher number and multiply that number by the lifespan of the car.
Subtract the projected salvage value of the vehicle from the cost. Then divide that number by the total miles the car will be driven. That is the mileage rate for depreciation. Each year, calculate the total mileage from the odometer and multiply it by that mileage rate.
- Mileage isn't the only way to depreciate a vehicle. Oftentimes, a company will use a simple percentage of value method to determine the depreciation expense. Ask which method is to be used when setting up the new asset.
- Take some time to accurately forecast the car's overall usage in order to get the best possible depreciation calculations. If your estimate is off and then you sell the car, you may get hit with tax consequences (especially if the salvage value is more than the depreciated value--meaning you make a profit).
R.L. Cultrona is a San Diego native and a graduate of San Diego State University. She holds a Bachelor of Arts in theater, television and film with a minor in communications and political science. She began writing online instructional articles in June 2009.