What is Depreciation?
Depreciation, also known as amortization, is basically a reduction in the value of an asset over time. What this means for your business is that if you buy a substantial asset like a vehicle or equipment, you can claim a certain amount of the loss-of-value over time as a business expense.
It’s also a method of spreading the costs of large assets out over time.
There are two main methods:
You don’t have to use the same method for all your assets, but you must use the same method on an asset throughout the financial year. You can check with your accountant to find out the best method for you.
What depreciates and what doesn’t?
Value and life expectancy affect whether assets qualify and only those that are for business use can be depreciated. When calculating depreciation, you can’t include the sales tax paid at the time of purchase on your business assets.
It’s really important that all your financial records are kept up to date for many reasons, one of them being the ability to increase your business expenses, which in turn lowers your taxes owing on your corporate tax return. Most businesses leave this to their accountants, but it’s still important to understand the purpose of depreciation:
At the same time that you tell your accountant about the assets bought during a financial year, you should also supply a list of assets sold during the year, including the date of sale and the sale price. It is important to note that regardless of who you sell the asset to (a private person, or a company) – if you have a GST number you must charge sales tax on the asset sold.
If you get more for an asset than its depreciated value, you will claim a gain on the sale and you’ll pay tax on the difference. If you get less for the item than its depreciated value, you can claim the difference as a loss and it will decrease your corporate tax bill.
There are some additional factors that can have an impact on a small business, such as:
What you’re looking to do is fully understand how depreciation works, so that you can maximize your tax benefits. Your accountant will take care of this for you, but it’s still important to understand how it works. Comprehensive accounting software can also help you to understand, manage and calculate depreciation on your business’s assets.
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