Do you know that depreciation has a tax impact? Obviously, it has a tax impact because it is a method that is used to calculate the cost value of any property. Depreciation, in general, helps a company or property owner to reduce the amount of taxes they are paying for a year. When the company’s tax bill is lower, the income funnel increases which is a beneficial factor for any business. This is the reason that makes many small to large-scale businesses practice depreciation.
Ways for calculating depreciation
There are 3 different types of depreciation to calculate the value of an asset. They are
- Double declining (when you utilize the asset more on initial years of useful life)
- Declining balance(Only when the asset is highly used during the first few years)
- Straight-line depreciation (It is used for assets that have no time pattern to follow)
Every method helps the depreciation calculation in a unique way and it also changes the value accurately thus reducing the taxes paid.
The straight-line depreciation method is the most common method for calculating depreciation. Only two values are taken into consideration for this method. The value of the asset during the first year of purchase and the final year of the asset’s productive usage. The difference from both of these values is taken as straight-line depreciation.
Depreciation value formula = Total cost – Recover value / Usage period
Double declining balance
As the name itself suggests, it is one of the accelerated depreciation methods where the asset value is depreciated two times higher than in straight-line depreciation. The accelerated depreciation method is when the depreciation happens at a faster rate. The two times faster is the exact calculation for the accelerated depreciation method. The depreciation rate in this method is normal, not higher as the name suggests. The formula for calculating your double-declining balance is given as :
Double declining balance method formula = 2 x Total cost of an asset / Total usage period
Declining balance method
This method is called the diminishing balance method, or reducing balance method. It is used to make a note of values during the first few years of the asset’s life. Only a smaller depreciation is recorded during the next few years of the asset’s usage period. It is generally used for electronic gadgets and high-end technology products. Even depreciation on computers is calculated using the declining balance method. In simple terms, it is the opposite of straight-line depreciation.
Declining balance method formula = Value of the asset in the early year x total rate of depreciation / 100
These are the methods that are used to calculate depreciation. To reduce your property tax with different methods of depreciation, O’Connor is here to help you out!