Tax Depreciation Explained and How to Calculate- A Guide for Beginners

Author : ivan2121
Publish Date : 2021-03-29 13:04:36
Tax Depreciation Explained and How to Calculate- A Guide for Beginners

When you hear the word "depreciation", what comes to your mind? We're sure you're thinking that it's not a good word since it sounds like the opposite of "appreciate", but when it comes to your tax savings, you'll definitely appreciate it. 

If you're planning to file depreciation on taxes and it's advised by your accountant, you may want to read about its basics first and make sure that you are aware of how to leverage depreciation to its maximum capacity. So, don't worry because, in this article, we're going to share with you the information you need.


Definition of Tax Depreciation 

If you don't have any idea what depreciation is, it's the process of reducing the total cost of something expensive you've invested in for your business. However, rather than entirely performing it in one tax year, you can write off parts of it over time. When you know how to depreciate assets, you'll be able to organize how much money is written off every year, providing you with more control over your finances. 

Tax officials deal with depreciation expenses as the deduction of tax. In simpler words, you as a taxpayer can acquire depreciation expense for entitled tangible assets to deduct their taxable salary or income and the tax amount owed. 

When it comes to tax depreciation, you may use various assets that can be sorted into different classes, and every class has its own functional life. If you have a business that utilizes a different process of depreciation for your financial statements, you may choose on the asset's function useful life established on how long you are expecting to use the asset in your business. 


Assets Qualified for Tax Depreciation 

The rules of tax depreciation may vary depending on what the tax jurisdiction is. Thus, the assets entitled for a claim of tax depreciation expense may differ among countries. Nonetheless, there is some key basis for your assets to be qualified for depreciation claims that you may find across different jurisdictions: 

1. The taxpayer owns the asset. A taxpayer can acquire depreciation expenses only for those assets that are regarded as property owned by a taxpayer. If the assets are intended for personal use, they are not eligible for the claim of depreciation. 

2. The asset has a calculable practical life. For you to claim depreciation, your asset must be able to have a useful life that can be fairly estimated. Basically, one can offer a reasonable estimate of the total of years throughout which the asset will be kept in service until the time comes when it will become outdated or will cease to create any economic profits. 

3. The asset must have a useful life that surpasses one year. Depreciation can be acquired only for long-term assets. This means that the assets can be used for more than one year. 


Common Examples of Assets That Can Be Depreciated (by small businesses) 

  • Real Estate 

  • Equipment 

  • Vehicles

  • Computers

  • Office furniture 


Understanding Depreciation Schedule 

A depreciation schedule is simply a table that provides you with the amount of each of your assets that will be depreciated over the years. The schedule normally includes the following details: 

  • The date when you bought the asset

  • Description of the asset

  • The overall price you paid for the asset 

  • Useful life expectancy 

  • Used depreciation method 

  • Value of the salvage (this means the price that you can sell it for once it's past its useful life) 


The Calculation of Tax Depreciation 

How tax depreciation is calculated depends on your country, of course. Commonly, in the United States, tax officials offer thorough guides to their taxpayers on the laws applicable to the depreciation of concrete assets. 

Another example, the CRA or Canada Revenue Service, a federal tax agency located in Canada, gives out the guide about the CCA or Capital Cost Allowance. CCA is crucially a tax deduction connected with the depreciation of assets under Canadian tax laws. In Canada, the CRA divides the entire assets entitled for CCA claim into different classes. Every asset class has its respective depreciation rate and method of calculation. For instance, rental buildings are categorized under Class 1 and must be depreciated at a 4% rate. 

You must be aware that the depreciation expense documented by a business on its financial statements may be distinct from the depreciation expense acquired on a tax return. The reason is that the methods applied to calculate the expense of depreciation for tax plans and accounting do not coexist all the time. 

Category : business

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