Fair Market Value

• In some tax districts, taxpayers base personal property -- all types of property that isn't real estate -- on equipment purchased for business use using an estimate of equipment's fair market value, or the price that the sale of the equipment would raise if the business sold it. This value may vary greatly depending on the condition of the equipment, the market for that type of used equipment and regional differences. Although this assessment method assumes the equipment's value declines with use, its value is tied to real-world returns, not amortizations based upon a depreciation schedule.
  
  

Predetermined Value

• Rather than leave assessments of equipment's value to market forces, some tax districts create their own depreciation schedules for certain types of assets. Taxpayers who live in districts that use this method simply deduct a prescribed percentage of the equipment's value each year of its life cycle to determine the asset's taxable value. For example, a three-year-old piece of equipment purchased for $10,000 may decline in value 5 percent the first year it's in use, 10 percent the second and 15 percent the third year of use, reducing its taxable value by 30 percent, to $7,000.
  
  

Flat-Rate Value

• A less common method of determining personal property's taxable value is to assess a flat tax assessment on owners, regardless of the property's purchase price or depreciated value. This method is usually reserved for taxation of personal property, such as boats, airplanes and automobiles. Asset types can be easily grouped into classes by size, weight or purchase price. Tax districts may find difficulty assessing a flat rate against specialized business property such as its equipment.
  
  

Depreciation and Federal Taxes

• Businesses may deduct the purchase cost of equipment from their income taxes, but only across a several-year period as determined by the IRS. This process allows businesses to claim an amortized portion of the equipment's original purchase price each year, with amortization schedules created for three-, five-, seven-, 10-, 15-, 20-, 27.5- and 39-year schedules. While these amortization schedules help to approximate the declining value of an asset, they don't necessarily reflect its real-world value. Amortization schedules are primarily used for tax accounting.