CIMA F1 Syllabus C. Fundamentals Of Business Taxation - Calculating Tax Depreciation - Notes ^{2 / 4}

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