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Know about depreciation | Online Tax

May 26, 2024

Know your Tax Return and all about Depreciation

Depreciation is the erosion of value of a piece of equipment you buy for your job. And applies to those bits of equipment that you'll get use out of for more than a year.  For instance, your a mechanic and have just bought a piece of heavy equipment for $3000.  You know you'll get at least three years out of it, so that, in general terms, will give you a depreciation expense of $1000 per year.  

Options for Depreciation

There are a few methods to calculate depreciation:

  1. Straight-Line Depreciation: This method spreads 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.

  2. Diminishing Value Method: Here, you apply a constant percentage to the remaining value of the asset each year, which means larger deductions in the earlier years.

  3. 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).

DepreciationGotax works all this out for you and determines your best option.

How It’s Calculated

Depreciation calculations depend on the method chosen and the asset's effective life. For instance, under the straight-line method, you divide the asset's cost by its useful life. For diminishing value, you apply a fixed percentage to the asset's book value each year. The instant asset write-off allows for immediate deduction if the asset cost is below the threshold and used for business purposes.

What It Applies To

Depreciation applies to assets like machinery, vehicles, and office equipment.  Effectively, anything you use in your job or business that can be used for longer than a year.

Examples for Individual Taxpayers

  1. Electrician: Suppose you buy a new electrical gizmo for $10,000. Using the straight-line method, you expect to get 5 years out of your gizmo, you can deduct $2,000 each year as a depreciation expense. This helps reduce your taxable income each year, reflecting the camera's declining value.

  2. Independent Contractor (you must be a business): Imagine you buy a laptop for $2,500 to use for your consulting work. If you qualify for the instant asset write-off, you can immediately deduct the full $2,500 in the year you bought it. This provides a significant tax benefit right away, reducing your taxable income for that year.

Depreciation does provide tax benefits and should be maximised to get the best benefits in a particular year. Always check the latest rules or consult with Gotax to make the most of these options.

 

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