The sole purpose of tax depreciation is to
charge to expense a portion of an asset that relates to the revenue generated
by that asset. This is called the matching principle, where revenues and
expenses both appear in the income statement in the same reporting period,
which gives the best view of how well a company has performed in a given
reporting period. Tax depreciation is an income tax deduction that allows a
taxpayer to recover the cost or other basis of certain property. It is an
annual allowance for the wear and tear, deterioration, or obsolescence of the
property. Most types of tangible property except land, such as buildings,
machinery, vehicles, furniture, and equipment are depreciable. Likewise,
certain intangible property, such as patents, copyrights, and computer software
is depreciable. Tax depreciation Sydney begins when a taxpayer places property in
service for use in a trade or business or for the production of income. The
property ceases to be depreciable when the taxpayer has fully recovered the
property’s cost or other basis or when the taxpayer retires it from service,
whichever happens first.
A taxpayer must identify several items
to ensure the proper tax depreciation of a property, including:
- The
depreciation method for the property
- The
class of the asset
- Whether
the property is considered as “Listed Property”
- Whether
the taxpayer elects to expense any portion of the asset
- Whether
the taxpayer qualifies for any “bonus”
- The
depreciable basis of the property
The type of tax depreciation that most
closely links the creation of revenue to asset usage is the depletion method,
which charges natural resources to expense as they are extracted. Moreover,
this option is not available for most types of fixed assets.
The two methods allowed are the
Straight Line Method and the Diminishing Method:
Straight
Line Method
The straight-line depreciation allows the
taxpayers to claim depreciation deduction evenly over the useful life of the asset
where the cost of a depreciable asset is deducted evenly over the useful life.
In any case the total deductions allowed must not exceed the cost of the asset.
Diminishing
Method
The diminishing value depreciation method
allows taxpayers to claim the depreciation deduction for a tax year in respect
of a depreciable asset and is computed by applying the prescribed depreciation
rate against the written down value of the asset at the beginning of the year.
Under no circumstances should we consider
depreciation to be an approximation of a decline in an asset's fair value,
since fair value can increase or decrease over time and is related to supply
and demand, rather than usage. For a depreciation deduction to be allowed, the
asset must be used in the business or income-producing activity; the asset must
have a determinable useful life; the asset must be used or expected to be used
for more than one year. If we were not
to use tax depreciation Sydney at all, then we would be forced to charge all assets to
expense as soon as we buy them. This would result in large losses in the months
when this transaction occurs, followed by unusually high profitability in those
periods when the corresponding amount of revenue is recognized, with no
offsetting expense. For this, a company that does not use depreciation will
have front-loaded expenses, and will experience extremely variable financial
results.
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