Importance of Tax Depreciating

Tax depreciation is an accounting tool used to spread the cost of valuable assets over a number of accounting periods. Rather than incurring the entire expense in a single period, business owners can create a depreciation schedule under several methods, including the straight-line method, the units-of-production method and the declining-balance method. Each method calculates a portion of the expense to be recognized on financial statements in a series of periods, eventually resulting in recognition of the full expense. Depreciable amount equals cost minus salvage value. Cost is the amount at which the fixed asset is capitalized. Salvage value or also called residual value or scrap value is the estimated value of the fixed asset at the end of its useful life. Since an amount equal to the salvage value can be recovered by selling the asset, only the difference between the cost and the salvage value is depreciated.

The Basics of Tax Depreciation

A very simplified version of how business income taxes in:

• You add up your revenues (total income)
• You subtract your expenses (deductions)
• You report the difference (taxable income)
• You multiply your taxable income by a tax rate, to calculate your total tax

There are certain categories of expenses that businesses are not allowed for tax depreciation immediately. Most importantly, businesses cannot take an immediate deduction for the cost of their capital expenses. The category of capital expenses includes any business purchase that is expected to be useful for a long time: machinery, furniture, computers, buildings, and so on. Due to its simplicity, straight line method of depreciation is the most commonly used in tax depreciation. Accounting principles require companies to depreciate its fixed assets using method that best reflects the pattern in which the assets are being used. While the straight-line method is appropriate in many situations, some fixed assets lose more value in initial years. In such situations other depreciation methods are more appropriate.

You should create a tax depreciation schedule as soon as possible after settlement, preferably before tenants move in. This will allow you to maximise your tax benefits and will help you to avoid causing disruption to your tenants. If you didn’t get a depreciation schedule when you first purchased your investment property, you can still get one now and start claiming your deductions moving forward.

There are two types of tax depreciation that you can claim:

• Depreciation on plant & equipment: this refers to items within the building like ovens, hot water heaters, air conditioners, carpets, blinds and so on.
• Depreciation on buildings or ‘building allowance’: this refers to the construction costs of the building itself, such as concrete and brickwork.

Brisbane tax depreciation is the deterioration of an asset, in this case the investment property, and is accepted by the ATO (Australian Taxation Office) as a deduction to offset the tax payable on your assessable income. The depreciation schedule should be arranged from settlement of the property and given to your accountant to include in your annual tax return.