Tax depreciation schedule
- March 15, 2023
- 5 min read
True story.
Once upon a time, there was a small business owner named Sarah. She owned a clothing retail store in a bustling town and had always managed her finances well.
However, one day, she received a letter from the ATO informing her that she had failed to claim a tax depreciation schedule for her store’s assets.
Sarah was unaware of this tax schedule and didn’t understand its importance.
She decided to call Sleek to get a better understanding of the situation. We explained to her that a tax depreciation schedule was a list of assets used in the business and their estimated useful lives, which could be used to claim tax deductions.
Sarah was shocked to know that her old accountant did not tell her about this and she had missed out on these tax deductions for so many years!
She immediately asked her (newly appointed) Sleek accountant to prepare the tax depreciation schedule for her business.
After reviewing the schedule, Sarah realised that she could claim a significant amount of tax deductions by including the depreciation of her store’s assets, such as fixtures, equipment, and even the building itself.
Sleek helped Sarah file the tax depreciation schedule and claim the tax deductions.
To her surprise, she received a considerable refund from the ATO.
Even better news! Sarah was able to use the refund to upgrade her store and purchase new stock and better store fittings, which will help her business grow even more.
Moral to the story is – if you’re a business or investment property owner you’ll want to know about tax depreciation schedules.
They can help you maximise your tax benefits, reduce your tax bill, and comply with the tax laws and regulations.
Let’s get started…
Overview:
- What is a tax depreciation schedule?
- Why do you need a depreciation schedule?
- How do you calculate a depreciation schedule?
What is a tax depreciation schedule?
A tax depreciation schedule is a document that outlines the depreciation expenses of a business or an income-generating property, such as a rental property, for tax purposes.
The schedule is used to determine the amount of depreciation expenses that a business or property owner can claim as a tax deduction each financial year.
Why do you need a depreciation schedule?
There are several reasons why you may need a depreciation schedule.
Tax savings
By claiming depreciation expenses as a tax deduction, you can reduce your taxable income, and thus reduce your tax liability.
Compliance with tax laws and regulations
A depreciation schedule helps business and property owners to claim depreciation expenses on their tax returns each financial year as well as, comply with these requirements by providing a detailed record of the depreciation expenses claimed.
Record keeping
A depreciation schedule provides a detailed record of the business or property assets and their depreciation expenses.
Improved budgeting and cash flow
By knowing the depreciation expenses business and property owners can budget for these expenses in advance and plan their cash flow accordingly.
All good reasons to complete an accurate tax depreciation schedule!
So now how do you create one?
How do you calculate a depreciation schedule?
As the depreciation schedule calculates the depreciation expenses for tax purposes, we’re going to discuss how to compile and calculate this schedule.
The calculation of a depreciation schedule involves several steps, including:
- Identify eligible assets
- The first step is to identify all of the assets within your business or property that are eligible for depreciation. This may include the building structure, fixtures and fittings, and plant and equipment.
- Determine the purchase price
- The purchase price of each asset must be determined, as this will be used to calculate the depreciation expenses.
- Determining the expected useful life
- The expected useful life of each asset must be estimated, as this will determine the period over which the depreciation expenses will be spread. The useful life is typically determined based on industry standards or the manufacturer’s specifications.
- Determining the depreciation rate
- The depreciation rate for each asset is determined based on the expected useful life and the type of asset. In Australia, the ATO provides guidelines on the depreciation rates that can be claimed for different types of assets.
- Calculating the depreciation expenses
- The final step is to calculate the depreciation expenses for each asset. This is done by multiplying the depreciation rate by the cost of the asset. The total depreciation expenses for the property are the sum of the expenses for each asset.
As you can see, the calculation of a depreciation schedule is a complex process that requires expertise and attention to detail to ensure that the correct amount of depreciation is claimed for tax purposes.
What are the three methods of depreciation?
When you are creating your tax depreciation schedule, there are 3 common methods used to calculate depreciation for tax and accounting purposes:
1. Straight-line method
This is the simplest method, and it calculates the same amount of depreciation each year over the useful life of an asset.
The formula for this method is (cost of the asset – residual value) ÷ useful life.
2. Accelerated method
This method calculates a higher amount of depreciation in the earlier years of an asset’s life, and a lower amount in later years.
The two most common accelerated methods are the double declining balance method and the sum-of-years digits method.
3. Unit of production method
This method calculates depreciation based on the number of units produced by the asset.
This is often used for assets that have a direct relationship between usage and production, such as machinery.
The formula for this method is (cost of the asset – residual value) ÷ total units of production.
The method you choose will depend on the type of asset you have, the length of its useful life, and your specific tax and accounting needs.
It’s best to consult a tax professional or accountant to determine the best method for your specific situation.
I need Sleek accounting services
Tax depreciation and tax depreciation schedules can be tricky.
We highly recommend you seek the advice of a qualified accountant or quantity surveyor to ensure that all assets are correctly identified and depreciated for tax purposes. They can also advise on the most appropriate method for calculating depreciation and the most tax-effective way to claim depreciation for your circumstances.
Call the Sleek accounting team on +61 4 9100 0480 or schedule a meeting using our online calendar
Want to know more? We’ve got some articles which may help you –
Tax depreciation – The ins and outs for businesses, investment property owners and employees
3 quick steps to calculate negative gearing on your property
