If you own a business or an investment property, then tax depreciation is one of the tax breaks you’re entitled to. You have fixed assets treated as capital investments – buildings, equipment, furnishing, business-related vehicles – and depreciating those assets is a common way to obtain tax benefits. Depreciated properties are written off in the form of annual depreciation expense, a deductible expense used for income tax purposes.
Generally, depreciation is used to generate tax deductions and defers tax payments. However, there are some common myths associated with the rules of claiming a tax depreciation deduction. In this article, we debunk some of them.
Myth 1: New properties are the only ones worth depreciating
Old properties are also depreciable since the purchase price of your overall property includes the land, building, and plant equipment. That being the case, even the properties built in the 80s are eligible for depreciation.
Myth 2: You can write off all depreciable assets worth $500 or less immediately.
These assets are considered as low-value assets and therefore can be written off. However, there’s an exception. They can only be written off immediately if a number of low-value assets were acquired at the same time from a single supplier. They should also have the same depreciation rate.
Myth 3: You have to own the asset before you can claim tax depreciation
While this is generally true, the extent of “ownership” may vary. For example, the lessee or the person who holds the lease of a property is deemed to own the property. That being the case, the lessee is able to claim depreciation on the cost incurred by him/her on leasehold improvements. As a taxpayer, just keep in mind that there are several conditions to be met for leasehold improvements in order to be depreciated for tax purposes.
Myth 4: If you forget to claim depreciation for this year, you can claim it next year.
It’s not that simple. An asset is deemed to have been depreciated whether or not the taxpayer neglects his/her duty to claim the tax depreciation deduction on their tax return. With this, the opening balance in the following year is regarded as the closing tax adjusted value of the asset as if the tax depreciation has been claimed.
As a taxpayer, you have three options:
- If you want to claim a deduction for a missed tax depreciation in the previous year, then it can be listed on the current tax return if the tax effect of the failure or error is $500 or less.
- However, if the tax effect of the missed claim is greater than $500, then you may request to modify the previous year’s tax return.
- You may also decide not to claim the omitted depreciation and simply focus on claiming depreciation from the current year on the corrected adjusted tax book value.
Myth 5: Intangible assets are not depreciable
For sure, you’ve heard that all tangible assets are subject to depreciation. But how about the intangible, nonphysical assets?
Some intangible assets that meet the criteria are depreciable for tax purposes. These assets include the right to use a land, a software, a trademark, a copyright, a patent, and a plant and machinery, among others. While physical assets can wear down and lose value over time, their intangible counterparts wear down too but in the form of contract expirations and obsolescence. Instead of using the term “depreciation”, the term “amortization” is best used to describe the process of reducing the worth of intangible assets.
Myth 6: Claiming depreciation is compulsory
Claiming your tax depreciation helps in maximizing available deductions and reducing tax payments. However, it’s not compulsory and you have the option not to claim it in order to provide relief from depreciation recovery income on the property. But if you wish not to claim it, you just have to state this in writing and include it in the tax return.
Myth 7: Accountants are qualified to prepare depreciation schedules
Though they have the knowledge about properties and taxes, accountants as well as real estate agents and property appraiser are not allowed to estimate the construction costs and prepare depreciation schedules. Only professional quantity surveyors are qualified to do such intricate task.
Carmina Natividad is a savvy writer for Depreciator, an Australian-based business specializing in Tax Depreciation Schedules. Being an enthusiast of pursuing financial security herself, she writes and shares self-help articles focused on personal finance, tax planning, and property investing.