Calculating Tax Depreciation

NotesQuizObjective Test

Tax Depreciation replaces normal depreciation in the tax computation

Process for calculating it - using reducing balance WDAs

  1. Take the cost and multiply it by the writing down allowance %

    eg. 1,000 cost x 25% WDA = 250

    Year 1 Tax depreciation = 250

  2. Now take the NBV (1,000 - 250) = 750

    Multiply it by WDA % = 750 x 25% = 187.5

    Tax depreciation for year 2 = 187.5

  3. This continues until the year of sale - let's say the year of sale is year 3

    Here it gets sold for 480


    STEP 1: Calculate the tax depreciation we should have been allowed in TOTAL = Cost less receipts = 1,000 - 480 = 520

    STEP 2: Compare this figure to what has been allowed so far: 250 + 187.5 = 437.5

    So we are allowed an extra 520 - 437.5 = 82.5 tax depreciation for the year

    It is sometimes called a balancing allowance

Note:

  • A balancing allowance will DECREASE Taxable profits

  • A balancing charge will INCREASE Taxable profits

Illustration

What if the asset gets sold for 800

STEP 1: Calculate the tax depreciation we should have been allowed in TOTAL = Cost less receipts = 1,000 - 800 = 200

STEP 2: Compare this figure to what has been allowed so far: 250 + 187.5 = 437.5

So the balancing charge = 200 - 437.5 = - 237.5

and we have to INCREASE our taxable profits by 237.5

NotesQuizObjective Test