What is the difference between depreciation for accounting purposes, and depreciation for tax purposes?
March 3rd, 2010 | by admin |
Is it because you can write off more in your accounts, than technically claim in your company tax return?
Depreciation for accounting purposes is designed to reflect the economic life of an asset and so spread its value over that life. It is based on the principle of matching income with expenses incurred in the same period – so if you used 1/5 of the ‘value’ or ‘life’ of an asset then the idea is that you charge 1/5 of its cost to that financial period.
The tax regime is driven by political and economic considerations, and as such any ‘allowable depreciation’ (called capital allowances in the UK) is designed to reflect different emphases – such as the desire to encourage investment by certain types of business incertain types of asset. For instance in the 2008 tax year in the UK companies can claim an Annual Investment Allowance of up to £50,000 for investment in assets regardless of their estimated life in one go (put very crudely, and with the usual caveats that things are never quite that simple). In this case, for instance, you can claim back more through the tax allowance than you do via your accounts – in the year of purchase – but less in later years until it balances out.
3 Responses to “What is the difference between depreciation for accounting purposes, and depreciation for tax purposes?”
By Spock (rhp) on Mar 3, 2010 | Reply
the recovery periods and expected useful lives are probably different, and perhaps the allowable depreciation methods.
thus, the amount of depreciation reported for financial accounting and income tax purposes is likely different.
References :
cpa
By certaxrugby on Mar 3, 2010 | Reply
Depreciation for accounting purposes is designed to reflect the economic life of an asset and so spread its value over that life. It is based on the principle of matching income with expenses incurred in the same period – so if you used 1/5 of the ‘value’ or ‘life’ of an asset then the idea is that you charge 1/5 of its cost to that financial period.
The tax regime is driven by political and economic considerations, and as such any ‘allowable depreciation’ (called capital allowances in the UK) is designed to reflect different emphases – such as the desire to encourage investment by certain types of business incertain types of asset. For instance in the 2008 tax year in the UK companies can claim an Annual Investment Allowance of up to £50,000 for investment in assets regardless of their estimated life in one go (put very crudely, and with the usual caveats that things are never quite that simple). In this case, for instance, you can claim back more through the tax allowance than you do via your accounts – in the year of purchase – but less in later years until it balances out.
References :
http://www.hmrc.gov.uk/capital_allowances/investmentschemes.htm
http://moneyterms.co.uk/depreciation/
By Judy on Mar 3, 2010 | Reply
It’s usually the other way around, the tax code allows you to take an appreciated depreciation.
References :