Tax Depreciation - Boon for Business

Some people view taxes the hard way in relation to their businesses. The powers-that-be may have anticipated such views and did some counter measures to alleviate the difficulties. Tax depreciation Sydney is one of them.

In simple parlance, this is the depreciation that can be listed as an expense on a tax return for a given reporting period under applicable tax laws. Finally, it is used to reduce the amount of taxable income reported by business.

Deductions

The depreciation expenses are tax deductions which are allowed under certain related tax rules. These are non-cash expenses simply because they are not actual cash outflow. They are actually charges used to recover an asset’s earlier cash purchase.

In claiming the tax deductions, companies need to apply the non-cash depreciation expenses against the income that is taxable. This will lower the amount of the payable tax. Different assets also have different lengths of taxable life based on relevant tax rules.

For reasons that the value of an asset is allocated and expensed over the period it will be in use, the shorter the asset’s taxable life, the greater are the taxable deductions for the company. Depreciating assets over a shorter period with higher depreciation expenses will not only provide higher tax benefits, it will also encourage businesses to replace the assets faster.

Deduction choices

Companies are also entitled to elect among the different depreciation methods which they would like. This is about the amount of depreciation expense they would want to charge each year based on the amount of revenue for the same year.

This is due to the fact that a company’s revenues may change over the life of the asset they are using. Matching the amounts of depreciation deductions with the changing revenues can help the company maximize its tax benefits.

Declining balance method

One example is that a company may use the declining balance depreciation methods if it can anticipated that there are potentially higher revenues from a new asset. The declining balance method is an accelerated depreciation method allocating larger amounts of depreciation expenses to earlier years.

The result is that a company can offset its expected higher revenues in the earlier years with larger depreciation expenses in the same periods. All these are to reduce the payments of taxes.

Asset disposal

Depreciating assets helps defer a company's tax payments but may not completely eliminate them in the end. A company may not be able to fully keep the tax savings from this practice.

On the other hand, the selling of a depreciated asset (also called asset disposal) may also involve capital gains. This is in addition to the typical ordinary income gain in the form of depreciation recapture.

Capital gains

The proceeds from the sales of the assets in excess of the sum of the salvage value and the full amount of the recaptured depreciation deductions are actually considered capital gains and are taxed at a more favorable rate.

Depending on the sales value, there may not be any capital gains. A lower sales value helps save the company from paying taxes on recaptured depreciation deductions. All these on are within tax depreciation Sydney of assets.