Depreciation in Business
Many business owners think that they cannot afford to invest in equipment or vehicles for their businesses. However, they may not be aware of how depreciation deductions can assist them. Depreciation deductions allow businesses to subtract the purchase price from your business's gross income, thereby lowering taxation liability.
Simply put, depreciation is a way of recovering the cost of a purchase over a period of time, usually over several years. The depreciation deduction is based on the idea that your purchase tends to decline in value over the years, as it becomes older and natural more worn.
The rates of depreciation are variable. During each accounting year, a figure of depreciation will be calculated which represents an approximation of the cost to your business of owning the asset.
For example, a computer expected to last three years might be written off on a 33.3% 'straight line' basis. This means its entire cost would be written off in equal amounts over a three year cycle.
To work out depreciation you need to know:
- The date you started using the asset
- The asset's estimated useful life
- The asset's initial cost
- Any possible value it may have at the end of its use - e.g. as scrap ø
- Any costs that may be related to disposal
Last but not by any means least it is important to seek advice about the options available to your business. Taking the time to consult with an accountant will naturally lead to making wiser choices for your business.
