De­pre­ci­a­tion can have big ef­fect on tax

Hawke's Bay Today - - Money - By Jeremy Tauri Jeremy Tauri is an as­so­ci­ate at Plus Char­tered Ac­coun­tants.

De­pre­ci­a­tion is a line in the fi­nan­cial state­ments that’s not talked about too of­ten.

Most don’t re­ally take it into ac­count un­til end-of-year tax time. So what is it, how does it work and what things do you re­ally need to think about when it comes to the D word?

De­pre­ci­a­tion is wear and tear of an as­set mea­sured in dol­lar terms. The IRD set the rates which are spe­cific for dif­fer­ent as­sets and in­dus­tries and gen­er­ally de­pre­ci­a­tion ap­plies to stuff over $500 that’s go­ing to last more than a year. It is claimed on a monthly ba­sis. You need to know the date you pur­chased the as­set and track its life un­til it’s sold or its full value is writ­ten off.

Never un­der­es­ti­mate de­pre­ci­a­tion, es­pe­cially if you’ve in­vested in a lot of gear and ma­chin­ery. De­pre­ci­a­tion not only recog­nises the cost of wear and tear but the cost of fu­ture re­place­ment. De­pre­ci­a­tion can have a mas­sive ef­fect on the tax num­bers — if you’re fore­cast­ing and do­ing some tax plan­ning make sure you do de­pre­ci­a­tion cal­cu­la­tions.

No one can de­pre­ci­ate you like your ac­coun­tant can

I’ve seen some in­ter­est­ing ap­pli­ca­tions of rates ap­plied with var­i­ous in­ten­tions and there are some quirks and rules that make de­pre­ci­a­tion a task for ex­perts. If you’re do­ing your own tax re­turn with self-em­ployed in­come it doesn’t hurt to get your de­pre­ci­a­tion cal­cu­la­tions re­viewed — you may get a bet­ter rate out of an ex­pert or you may save your­self penal­ties.

Re­cov­er­ing from de­pre­ci­a­tion

The sale of an as­set for more than it is worth in the books can trig­ger what they call de­pre­ci­a­tion re­cov­ery. Say you buy a tool for $1000, it de­pre­ci­ates to $500. If you sell it for $900 the dif­fer­ence be­tween the $500 de­pre­ci­ated value and its sale value of $900 is in­come. This $400 dif­fer­ence is de­pre­ci­a­tion re­cov­ery and, yes, you pay tax on that in­come.

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