Depreciation in a taxation context refers with an expense that is incurred over maintaining the machineries and land and building for series of years. It is considered as a legal application to the laws of taxation for getting effective tax benefits at the helm. It plays out an imperative role in reducing the amount of taxable income that contributes significantly in the accounting measures. It is charged prominently over the fixed assets that comes with a realisable value and useful life years. Different types of depreciation method are available for different assets so as to earn benefits in tax filling. They come with different standards and terms which gives varied benefits on an individual ground. It is ineffective to change the depreciation method on frequent basis. You won’t get reliable results out of it. It includes –
- Discounted Cash Flow Method.
- Reducing Balance Method
- Straight Line Depreciation Method.
- Annuity Method
- Method for maintaining the Sinking Fund
- Sum of Years’ Digits Method.
- Insurance Policy Method.
- Diminishing Balance Method.
- Method of Double Declining Balance
- Discounted Cash Flow Method.
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Depreciation on taxable ground differs with different accounting standards and acts like GAAP and IFRS that follows a different framework in maintaining the books of account at par. Different types of formats are used in allocating fixed cost and charging it partially or fully. Under some laws, you can get concession up to one year in case of tax relief. They accelerate and maintain the useful life years of your plant and machineries, land and building and many more realisable assets that are used prominently in evaluating the balance sheet and calculating the net profit and gross profit.
The concept of depreciation involve the computation of time value of money that gives a predictable estimates of the value of your project in the given set of years. It is used by professional investors who calculate their money and interest on the basis of gestation period. Tax Depreciation often plays out crucial role in reducing the taxes owned over net present value.
It is believed that straight line method is one of the most effective method of calculating and computing depreciation over realisable assets that gives a realistic representation of the value of assets in the current period and in the future period over astable period of time. Also, book depreciation and tax depreciation must be calculated differently under same approach over the useful life of assets in the contemporary scenarios. You can take the help of capital claims to maintain a separate record that can be retrospect in case of emergency of transparent auditing. Outsourcing is one of the most efficient ways of focusing on competencies that ultimately represent your work on the behalf of your business.
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