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Are you using the most tax-efficient method to depreciate your business assets?

by , 14 November 2013
Hopefully, you depreciate your company's assets, allowing you to claim back wear and tear allowances from SARS. But not all methods of depreciation are efficient...

The tax gurus at the Practical Tax Loose Leaf explain how to depreciate assets using a tax-efficient method. Take a look!
 
There are two methods of depreciation:
 
  1. Straight-line
  2. Reducing balance
 
Let's look at each of these in more detail
 
  1. Straight-line method:You must write the asset off in equalannual instalmentsover its estimated useful life. The annual instalment per year is the amount you claim as your wear and tear deduction on your tax return.
 
  1. Reducing balance method:You must write off the asset on the book value of the asset. You'll get the book value of the asset by deducting depreciation from its cost price. The book value gradually reduces each year when you deduct depreciation.
 
There's only one way to depreciate assets that's the most effective though...
 
The straight-line method is the most effective methodused when determining depreciation and wear and tear.If you use the reducing balance method, every year your depreciation is less than the previous year but with straight-line it's the same.
 
Example
 
Mr Jones purchases a computer at a cost of R30 000.
The computer is depreciated over a period of 3 years(33.3% per year).
 
The straight-line method
Year                       Cost price            Calculation                         Wear and tear per year
                                                                                                               

1                              R30 000                 R30 000 x 33,3%                R10 000
2                                                              R30 000 x 33,3%                R10 000
3                                                              R30 000 x 33,3%                R10 000
 
Accumulated wear and tear 30 000
 
The reducing balance method
Year                      Cost price            Calculation                                                         Wear and tear per year
                                                                                                                               

 
1                                              R30 000                                 R30 000 x 33,3%                                                R10 000.00
2                                                                                              (R30 000-R10 000) x 33,3%                            R6 666.67
3                                                                                              (R30 000-R10 000-R6 666.67) x 33,3%       R4 444.44
Accumulated wear and tear                                                                                                        R21 111.11
 
When Mr Jones uses the straight-line method thecalculation is far simpler than the reducing balancemethod. The amount of accumulated wear and tearthat'll be used as a deduction on his tax return is also fargreater. This results in the straight-line method being more effectivefor tax saving.
 
If you've never considered depreciation before, then what are you waiting for? Put these tips into use today, and start saving!

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