Understanding Depreciation
The concept of depreciation is one of those things you'll become familiar with once you're in business. Here's what it is and how you calculate it.
Key Takeaways
The assets a business owns will mostly lose value over time as they get older. This loss of value is called depreciation.
A business can claim depreciation loss as a deduction expense each tax year.
A Diminishing Value or Straight Line Method are used to calculate depreciation.
Assets, otherwise known as substantial things businesses own mostly lose value over time as they get older. This loss of value is called depreciation. Business has claimed depreciation loss as a deduction expense each tax year. You treat depreciation like an expense and deducted from your gross income when you do your income tax return.
Meet Andy.
Andy has a coconut farm business with assets. Let's talk about depreciation with Andy's new coconut machine, new iPad, and old truck.
Andy has just bought a new coconut machine for his factory, as it is likely to last longer than 12 months and cost over $5,000.
He knows he can depreciate the machine at the end of the tax year (that's the 31st of March).
Depreciation rates are based on the expected life of the asset. In most cases, you can choose either a diminishing value or straight line method to calculate depreciation.
If Andy chooses diminishing value, he can claim a bigger deduction in the first year, but the deductions will get smaller in later years. Plus, it will take longer to fully depreciate the machine.
If he chooses straight line, she'll claim the same amount each year and the machine will be depreciated much quicker. And the users are online depreciation rates resource and fines plastic molding machines have a diminishing value rate of 13% and a straight line rate of 8.5%.
It's up to Andy which option he prefers. Andy also bought an iPad. It was only $800. Since it's classed as a low value asset, and he can deduct the full cost of it in the year he purchased it instead of having to spread the cost over the life of the computer.
If you already own an asset and introduce it into your business, you can then claim depreciation on the market value of the asset. The best way to determine market value of assets you want to depreciate is to get an independent valuation. Make sure you keep a record of any valuation you obtain.
If you then sell the asset, you compare the sales price to the assets adjusted book value and your fixed asset register. Any gain is taxable and any loss is deductible.
Back to Andy.
Andy received a valuation of $500 for his truck from a local dealership. He then decides to sell his truck. He puts an ad in the paper and sells it for $600. The truck had an adjusted tax value of $500 so Andy includes the $100 gain as income in his tax return.
On the other hand, if the truck had sold for $300, there would have been a loss of $200 that Andy could have claimed on his tax return.