Although trucks are known to depreciate between 15% and 25% annually especially if the trucks weigh approximately 13,000 pounds; however, note that how long you can depreciate your food truck in the United States will vary between 5-7 years.
Nevertheless, understanding that your food truck depreciates yearly and by what rate is a lifesaver especially in this line of business. For one it helps you to budget appropriately, estimate future expenses, and get the most return from your food truck business.
Depreciation is computed for fixed assets and this makes it possible to spread out the cost accumulated and inculcate the use of those assets into its existing market price.
As a food trucker, your fixed assets encompass your vehicle, all your equipment, and furniture, if any. Howbeit, one thing to note is that trucks tend to have the lowest depreciation rates of all vehicle divisions.
In the United States, its 5-year depreciation is fixed at 41.3% whereas other classes of vehicles and passenger cars are at 51.9% and SUVs are at 54.1%.
Such figures are considered high depreciation rates. Truck depreciation is calculated to be from 15% to 25% per year for the first 5 years as a general rule. Once these first 5 years’ elapse, your vehicle will just be valued at nearly one-third of the amount you have spent on it.
Factors to Consider When Calculating Food Truck Depreciation
Food truck depreciation is the gradual decrease in a mobile kitchen’s value over time owing to obsolescence and wear and tear. Nevertheless, to ensure you making the right decisions, below are factors to consider when calculating food truck depreciation.
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Purchase Cost
This is without doubt one of the most important things to take into account as it represents the original cost you incur when you purchase the food truck. It encompasses the purchase price, taxes, and related expenses, e.g., delivery fees.
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Useful Life
This refers to the truck’s productive years when it brings home the maximum returns. It falls within 5 and 7 years for trucks weighing approximately 13,000 pounds.
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Salvage Value
Salvage value is more or less the projected truck’s value at the end of its useful life. It’s the amount you could possibly sell the truck for or its scrap.
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Depreciation Method
In the United, there are two main depreciation methods–the straight-line and the accelerated methods. Although the straight-line method ideally distributes depreciation expenses over the useful life, accelerated methods tend to grant more depreciation in the first few years
How to Calculate Food Truck Depreciation
The two main depreciation methods – straight-line and accelerated methods – have their own benefits and drawbacks. The straight-line method is straightforward and is renowned as the easiest way to calculate truck depreciation.
Meanwhile, the accelerated methods tend to be quite complex and might require the expertise of an accountant. To utilize the straight-line method: let’s believe that your food truck has a $180,000 purchase price, a 5-year useful life, and a $15,000 salvage value.
Step 1: Calculate the truck value depreciated every year
Subtract the salvage value from the initial cost, i.e., (($180,000 – $15,000) = $165,000)
Step 2: Calculate the annual depreciation expense
Divide the truck’s yearly depreciation value by the useful life to come up with the annual depreciation expense. That is, $165,000 divided by five years, which is $33,000.
Step 3: Calculate the monthly depreciation expense
Divide the annual depreciation expense by 12 months, i.e., ($33,000/12) = $2,750.
Step 4: Design a yearly depreciation schedule
Below is a guideline to use.
Year 1:
- Depreciation Expense: $33,000
- Accumulated Depreciation: $33,000
- Book Value: $165,000 – $33,000 = $132,000
Year 2:
- Depreciation Expense: $33,000
- Accumulated Depreciation: $66,000 ($33,000 from Year 1 + $33,000 from Year 2)
- Book Value: $165,000 – $66,000 = $99,000
Year 3:
- Depreciation Expense: $33,000
- Accumulated Depreciation: $99,000 ($33,000 from Year 1 + $33,000 from Year 2 + $33,000 from Year)
- Book Value: $165,000 – $99,000 = $66,000
Go on with this process until the end of the food truck’s useful life.
Conclusion
One critical thing you have to understand in this line of business is that understanding the value of your food truck business is vital, and this incorporates whatever appliances, equipment, and utensils you own as part of the business.
If you’re looking to sell your mobile kitchen, be sure to understand how to value your property appropriately in order to ensure you obtain the best price possible.