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Depreciation: The most effective way to save on tax

by , 10 July 2014
Every business owner want more money back from SARS. After all, when you give it thousands of rands each year, every tax deduction and tax allowance helps.

Wear and tear allowances are possibly the most common and useful way to do this because all of your company's assets depreciate. This means you'll always have wear and tear you can claim.

But when it comes to working out the depreciation, one method will save you more than the other...

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 Two methods you can use to work out asset depreciation

 
 
1. Straight line; and
2. Reducing the balance.
 
With straight line, you deduct the depreciation off each year in instalments. With reducing the balance, you deduct 15% of the asset's current value from that value every year until the amount becomes zero. 
 
Both work well to help you determine the annual depreciation of your company's assets. But when it comes to saving on tax, one of these methods of calculating depreciation can help you more than the other...
 

So which asset depreciation method will save you more money?

 
The straight line method is by far the better way to go when you want to save more money on your tax bill. 
 
The reason is, with straight line, the amount of depreciation stays the same each year. When you reduce the balance, the amount decreases as the value of the asset does.
 
Let's say, for example, you bought a new Mac computer. It cost you R20 000 and has a lifespan of three years. This means it depreciates by 33.33% each year.
 
Using straight line depreciation you'll write off its value R6 666 at a time. This amount doesn't change each year.
 
But when you reduce the balance, you deduct 33.33% of the current value. So R20 000 - 33.33% = R 13 334. Now you calculate 33.33% of R13 334, which equals R444.
 
As you can see, reducing the balance leaves you with less and less to claim back each year, so for maximum saving rather go with straight line. 
 
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