Know about depreciation | Online Tax

Know Your Tax Return and All About Depreciation

Index

1. Introduction to Depreciation
2. Options for Depreciation
   • Straight-Line Depreciation
   • Diminishing Value Method
   • Instant Asset Write-Off
3. How It’s Calculated
4. What It Applies To
5. Examples for Individual Taxpayers
   • Electrician Example
   • Independent Contractor Example
6. Maximizing Tax Benefits

Introduction to Depreciation

Depreciation is the reduction in value of an asset over time, particularly for equipment purchased for work purposes. It applies to assets that you use for more than a year. For example, if you’re a mechanic and you purchase a piece of heavy equipment for $3,000, expecting it to last for three years, you can generally spread the depreciation expense over those years, resulting in a $1,000 deduction per year.

Depreciation three ways to go

There are a few ways to calculate depreciation:

Straight-Line Depreciation

With straight line depreciation you just allocate the cost evenly over the asset's useful life. For example, if you buy a $5,000 piece of equipment expected to last 5 years, you'd deduct $1,000 each year.

Diminishing Value Method

With diminishing value you apply a constant percentage to the remaining value of the asset each year.  This results in larger upfront deductions, your deductions decrease in subsequent years.  So $5000 piece of equipment, 20% depreciation using diminishing value.  First year 20% of $5000 is $1000.  Than leaves $4000 balance to claim.  Year 2 it's 20% of the balnce of $4000, which is $800, leabing a balance of $3200.  Etc Etc Etc 

Don't be tempted to take the larger deduction in the earlier years.  Always look at your marginal rate of tax to determine which method is appropraite.  You DO NOT want to creatre big tax deductions in low income years.

Instant Asset Write-Off

For small businesses, you might be able to write off the entire cost of an asset immediately if it falls below a certain threshold (like $30,000 for the 2024 income year).

At Gotax, we help you determine the best depreciation method for your situation.

How It’s Calculated

Depreciation calculations depend on the method chosen and the asset's effective life:

• Straight-Line Method: Divide the asset's cost by its useful life.
• Diminishing Value Method: Apply a fixed percentage to the asset's book value each year.
• Instant Asset Write-Off: Immediately deduct the full cost if the asset price is below the threshold and used for business purposes.

What It Applies To

Depreciation applies to assets like machinery, vehicles, and office equipment—essentially anything used in your job or business that has a useful life longer than a year.

Examples for Individual Taxpayers

Electrician Example

Suppose you buy a new electrical gizmo for $10,000. Using the straight-line method over 5 years, you can deduct $2,000 each year as a depreciation expense. This deduction helps reduce your taxable income annually, reflecting the equipment's declining value.

Independent Contractor Example

Imagine you purchase a laptop for $2,500 for your consulting work. If you qualify for the instant asset write-off, you can immediately deduct the full $2,500 in the year of purchase, providing a significant tax benefit by reducing your taxable income for that year.

Maximising Tax Benefits

Depreciation provides tax benefits and should be maximised to get the best financial outcome each year. Always check the latest rules or consult with Gotax to make the most of these options.