Depreciation may be defined as the gradual reduction of the value of a fixed asset over a certain period of time (depending on the type and class of the fixed asset). Depreciation is recorded as an expense that substantially reduces the taxable income of a business. Almost any property that is subject to wear and tear can get you a tax deduction.
There are a number of methods used for calculating tax depreciation. Some of them are outlined below;
• Modified Accelerated Cost Recovery System (MACRS)
The Modified Accelerated Cost Recovery System (MACRS) is commonly used for calculating the depreciation of all depreciable assets including tangible fixed assets such as equipment and buildings and intangible fixed assets such as copyrights and trademarks. The MACRS system of depreciation permits a larger deduction at the beginning of the useful life of an asset. Due to this reason, the method is considered as the best method reflecting the accurate value of assets after purchase.
• Accelerated Cost Recovery System (ACRS)
The Accelerated Cost Recovery System (ACRS) is usually selected by the taxpayer over the modified accelerated cost recovery system (MACRS), when the later method yields a higher deduction in the first year of the useful life of the asset, than the former method. For most asset classes, the ACRS method has replaced the straight line method of depreciation allowing for larger deductions.
• Straight Line Method
The straight line method of depreciation is commonly applied to intangible assets such as copyrights, patents and software. It is calculated by taking the acquisition price of an asset subtracted by the salvage value divided by the total productive years of the asset. Depreciation through straight-line method is calculated by using the following formula;
Depreciation = Purchase Price of the Asset – Salvage Value/Useful Life of the asset
• Income Forecast Method
This method of depreciation is mostly used for calculating the depreciation of intangible assets such as books, sound recordings, etc. The formula used for calculating depreciation through income forecast method is as follows;
Depreciation = Capitalized Costs * Gross Income (current Year)/Total Estimated Gross Income (Project)
A tax depreciation schedule is a report that outlines the depreciation allowances that a taxpayer can avail on his income generating property. All tangible assets deteriorate with time due to usage; therefore, a depreciation schedule is prepared for all tangible assets. The basis on which a depreciation schedule Melbourne is prepared for an asset is different for different types and classes of assets.
Using a Tax depreciation schedule, a business can save a substantial amount of money on their taxes. Primarily, there are two types of depreciation deductions; capital works deduction and plant and machinery allowance methods.
• Capital Work Deduction is applicable to the property that underwent structural modifications. Depending upon the construction date of the property, a deduction rate is applied. Most commonly a deduction rate of 2.5 percent or 4 percent is applied to structurally improved properties to calculate the depreciation deduction.
• Plant and Equipment Allowance methods permit an organisation to depreciate different components of the property or asset separately. Higher deduction rates can be applied whenever they are considered appropriate.
