Tax depreciation is the process of writing off the cost of an asset over its useful life. The purpose of tax depreciation is to provide businesses with a deduction for their capital expenses.
Sydney tax depreciation can be beneficial for many reasons, but it is important to understand how it works and how it can be used by your business.
What Is Tax Depreciation?
Tax depreciation allows you to deduct the cost of an asset from your income before calculating taxes. This deduction reduces your taxable income, which saves money on taxes in two ways:
- Deducting more than you spend on taxes increases your cash flow. You have more money available for other purposes because you are not paying as much in taxes.
- Your tax rate decreases as your income decrease, so if you are able to lower your taxable income through deductions such as tax depreciation, then your effective tax rate will also decrease — which means less money paid out to the government each year.
Why Do I Need To Know Tax Depreciation?
Tax depreciation is an important part of the accounting process. It is a way for businesses to write off the cost of their assets over time, rather than all at once.
If you use an asset to generate income, then you can claim it as a deduction when you file your taxes. The amount you can deduct depends on how much you used the asset and its value.
Tax depreciation is different from business expenses because you get to write off more than just the expenses associated with using an asset. You also get to take advantage of tax depreciation for any part of the asset that has a useful life greater than a year.
Tax depreciation might be one of the least understood tax deductions. It is a seemingly confusing concept that needs an expert to unravel the process. The truth is that tax depreciation is a very straightforward process. You just need to know the rules and how they work so you can use them to your advantage.
Here are 8 tips to help you maximize the benefits of tax depreciation.
Determine what you can depreciate.
Depreciation is a tax reduction that allows you to deduct the cost of an asset from your taxable income over multiple years. Most businesses are eligible to use depreciation, but not all assets can be depreciated.
Investment property owners are eligible for two types of depreciation:
- Plant and Equipment depreciation. This covers assets associated with your investment property that lose value over time as a result of use, wear and tear. This includes things like appliances, furnaces, air conditioning units, plumbing fixtures, and HVAC systems.
- Capital Works depreciation. This covers the construction, extension, improvement, or repair of your investment property. This includes things like major renovations, new construction, and additions.
The ATO has strict rules about what types of property can be depreciated as well as how much each type may be deducted each year.
Know Your Depreciation Method
The Australian Taxation Office (ATO) has published a number of guides to help you understand the tax depreciation rules. It is important to know what method you are using for tax depreciation because different methods will lead to different results. The two most commonly used depreciation methods are:
- Prime cost or straight-line – This method assumes that wear and tear on the asset will be even throughout its lifetime, so a constant rate can be applied to the valuation. This rate is calculated by dividing 100% by the number of years that an asset is expected to be useful.
- Diminishing value – This method assumes that an asset gradually loses value as it ages, and accordingly allows for higher depreciation write-offs in the beginning years of its life, and less as it gets older.
The difference between the two is that prime cost depreciation is based on the asset’s purchase price while diminishing value uses an arbitrary percentage of the purchase price to determine how much of the asset can be depreciated each year.
Keep All Your Receipts
Keep any and all receipts of everything you purchase for your investment properties, especially if you plan to take advantage of one of the above tax depreciation methods. If you don’t have receipts, it will be impossible for you to depreciate the cost of the item and may make it more difficult for you to claim deductions on your taxes.
Organize All Of Your Paperwork Ahead Of Time
Plan in advance to make sure that you have everything organized and ready to go before the tax deadline. This will make it much easier for you to file your taxes on time and ensure that you don’t miss any deductions or credits that could reduce your overall tax bill.
Before you get started on your tax return, make sure that you have all of your paper trails in order. This means gathering receipts, invoices, and business statements from the previous year and organizing them into one place.
Make sure that all of this paperwork is organized by date and category, so it is easy for you to find when needed. Once it is all in one place, you can then start working through each item on your list and deciding whether or not it qualifies as a legitimate expense according to the Australian Taxation Office (ATO).
Hire A Depreciation Professional to Prepare Your Tax Depreciation Schedule
If you are not familiar with tax depreciation, it might be a good idea to hire a professional to prepare your depreciation schedule. They will be able to fill in the information on your tax depreciation schedule and guide you through the process, so everything is filled out correctly and filed on time.
This will save you time and stress when preparing your return and ensure that everything is done correctly.
Tax depreciation is a great way to reduce your taxable income and can help save you money on your tax return. However, if you want to take advantage of tax depreciation, it is important that you understand the rules and regulations surrounding tax depreciation set out by the ATO.
In the end, the goal of tax depreciation is to help you save money on your tax return, so it is worth understanding how it works and how to use it properly.