June 26, 2023

How Depreciation Affects Your Small Business

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.

Calculating depreciation

There are two main methods:

  1. Straight Line Depreciation
    This is when you calculate the depreciation of an item based on the original cost price of the item. You claim the same amount each year.
  2. Declining Balance Depreciation
    This allows you to calculate the depreciation cost on the diminishing value of the asset, so the amount you claim each year will vary as the value item decreases.

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.

Record keeping

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:

  • Fixed assets, including proof of purchase.
  • The depreciation claimed.
  • The adjusted tax value of each asset.
  • A compliant invoice.

Selling assets

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.

Additional tips

There are some additional factors that can have an impact on a small business, such as:

  • Include depreciation in your costings – assets don’t last forever, and the depreciation is a cost to your business. So, build in the depreciation expense into the costings of your products and services.
  • You can only claim depreciation on the number of months that the asset was actually productive in your business during the fiscal year. So, if you purchased your computer three months before the end of your financial year, you can only claim three months depreciation for that financial period, not a full year.
  • You can only claim depreciation once the asset becomes productive – let’s say you order a piece of equipment from overseas. It takes three months to arrive, plus another month to be installed and set up. You can’t claim for these 4 months. Depreciation starts only when the equipment is actually in use.


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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