Tax Deductions

Tax depreciation is the continual decline in the value of property, which can be used as to offset income. Tax depreciation can lead to valuable income tax deductions that save small business owners thousands of dollars each year. But figuring out exactly how to calculate and claim the deduction is where things can get a little confusing. Tax depreciation works better for businesses than it does for individuals. If you think of depreciation, you might think of driving your new car off the lot and having it depreciate - decrease in value. But depreciation is actually a helpful tax-saving measure for businesses. It's important to learn how depreciation works so you can take advantage of it. You use tax depreciation to decrease your tax burden, since you are lowering your overall taxable income. But it’s important to understand that depreciation does not affect your company’s cash flow or its actual cash balance, since it’s a non-cash expense.

Depreciation is a non-cash expense that reduces the value of an asset over time. When it's stated that depreciation is "non-cash," it means that depreciation is taken as an accounting entry and that the amount of cash held by the business is not affected. Business assets that can be depreciated include equipment, machinery, technology and computers, office furniture, buildings and improvements to buildings, leasehold improvements to rented property, and business vehicles. Land cannot be depreciated because it appreciates instead of depreciating.

Tax depreciation can be taken on business assets to recognize the change in value of these assets as they age. Assets depreciate for two reasons:

• Wear and tear
• Obsolescence

The most common method of tax depreciation is straight-line depreciation, in which the same amount is expensed each year. Other methods are double-declining balance and sum-of-the-years digits. You might benefit from one of the other depreciation methods; talk to your tax professional and accountant about these. Most business expenses are deductible because they are an ordinary and necessary business expense that you spend money for in the current year and you get a deduction for that expense in that year. Tax depreciation is something that you can get a deduction for in the current year even though you might not have spent money to buy it in that year. Depreciating assets give you more income on your profit and loss statement and increase your assets on your balance sheet. Any third party looking at a business’ financial statements likes to see increased net income and an increase in assets over liabilities.

When you depreciate, or a write off which an asset over its useful life, you can take more depreciation in the initial years with accelerated depreciation. Depreciation on purchases of business assets can be accelerated, allowing you to deduct more of the purchase price earlier, sometimes entirely in the first year. Each class of assets has a life and table that specifies the amount of accelerated depreciation you are entitled to each year.

It might seem like an easy choice to use expensing if you qualify. But in some cases, it might pay to use regular Melbourne tax depreciation. That could be the case if you expect your business income and hence your business tax bracket to rise in the future. A higher tax bracket could make the deduction worth more in later years.