What is Tax Depreciation?
Depreciation is the reduction in value of a long term asset due to wear and tear. Most long term assets have a limited life, the exception being land, and therefore depreciate over time.
The method by which a business might calculate its depreciation for accounting purposes (book depreciation) can and usually does, differ from the way in which the asset can be depreciated under the tax authority rules and regulations of the country (tax depreciation).
The book depreciation is included in the accounting records, the tax depreciation is included on the tax returns the business files with the tax authorities. This means that two records, the accounting records, and the tax depreciation schedule, must be maintained for the depreciation of the long term assets.
For example, an asset which cost £10,000 and estimated by the business to have a useful life of 5 years will have a book depreciation of 10,000 / 5 = 2,000 per year. However, the tax authorities rule and regulations might stipulate that the machine is depreciated over 4 years, and so the tax depreciation calculation would be 10,000 / 4 = 2,500 per year.
Usually, over the total life of the asset the depreciation will be the same, in the above example this is 10,000, so the difference between book depreciation and tax depreciation is a temporary difference.
Tax depreciation is sometimes referred to as capital allowances in the UK.
For further information on tax depreciation see the Wikipedia definition.
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