BUSINESS ASSET DEPRECIATION

A POWERFUL TOOL FOR TAX SAVINGS
Understanding the best approach to depreciation can be game-changing for your business. Don’t miss out on essential tax savings that could optimize your cash flow. Explore effective strategies that business owners are using to enhance their financial outlook.
 
INTRODUCTION
Every business asset, from plant and machinery to office furniture and equipment, eventually becomes outdated. With advancements in technology, changing operational needs, and wear and tear, businesses must continually invest in the assets necessary for their operations. Fortunately, the Income Tax Act, accounts for this reality by offering standardized deductible allowance.

However, there are multiple ways to account for depreciation. Understanding and leveraging different depreciation methods can significantly maximize your tax savings, turning a routine accounting process into a strategic advantage.
 
DEPRECIATION OVERVIEW
Depreciation allows businesses to account for the loss of value over time for capital assets. If an asset is used to generate income and has a useful life of a year or more, it can likely be depreciated. However, certain items, such as inventory, land, and assets held for investment purposes, cannot be depreciated.

Some assets with a shorter useful life or lower cost are directly expensed rather than depreciated. If an asset doesn’t have a defined useful life, like land, or is easily liquidated, like inventory, it is not subject to depreciation.

The Double Declining Balance Depreciation (DDBD) is the default depreciation method for most assets under the Income Tax Act, 2015 (Act 896). DDBD accelerates depreciation, allowing larger deductions during the earlier years of an asset’s useful life. However, businesses have flexibility in choosing other depreciation methods to optimize tax savings.
 
DEPRECIATION METHODS
Several options exist for depreciating assets, each with distinct rules and benefits. Generally, once a method is chosen, it must be applied consistently throughout the asset’s life.
 
DESCRIPTION OF DEPRECIATION ALLOWANCE FOR TAX PURPOSE
This is an allowance granted to a person for using depreciable assets in the production of the income of the person during the person’s basis period ending in a year of assessment.


INCOME TAX ACT, 2015 (ACT 896): CAPITAL ALLOWANCE DEDUCTION
This is a standardized deductible allowance in place of Financial Accounting depreciation. It is granted to a person who owns depreciable assets and use those assets in the production of income from business. It is calculated in accordance with the provisions specified in the Third Schedule of the Act – Income Tax Act, 2015 (Act 896) as amended.
 
BASE RULES FOR GRANTING OF CAPITAL ALLOWANCE
1. Capital Allowance is granted on Depreciable Assets
2. The Depreciable Assets must be owned by the person applying for the allowance.
3. The Depreciable Assets must be used in carrying on the business of the person during the relevant basis period.
4. The Depreciable Assets must be owned at the end of a basis period of the person ending within the year of assessment.
5. Capital Allowance granted in respect of a particular year of assessment, shall not be carried over to another year by the person.
 
CHOOSING THE RIGHT METHOD
Selecting the most effective depreciation strategy depends on factors like total asset investment, current income, and future income expectations.
 
BEST PRACTICES
Effectively managing depreciation not only impacts tax obligations but also enhances cash flow. To optimize your financial strategy, consider the following best practices:

Timing purchases: Acquire assets toward the end of the fiscal year to claim full-year deductions, even if used for a short period.

Reinvest early savings: Use tax savings from accelerated depreciation to reinvest in your business, preparing for future tax liabilities.

Utilize technology: Employ software to track depreciation schedules and ensure compliance.
 
QUESTIONS?
Depreciation can be complex, and maximizing its benefits often requires professional guidance. Our expert accounting professionals can help tailor a depreciation strategy to your business’s unique needs, ensuring compliance and optimizing your tax savings.
Contact us today to turn depreciation into a strategic advantage for your business.