Depreciation can have big effect on tax
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.