AP 1 : Depreciation

steve2008

Hi, I just encountered a question which said something like.

a friend wants to know which depreciation method to use which gives her the larger net profit in the early years as she could do with the extra cash

Now, the answer says both methods are acceptable and wouldn't effect the cash. But wouldn't the Reduced balance method result in declaring a lower Profit and therefore a lower Tax bill?

I understand that for these CBTs this sort of thing is not important since no writing will occur. I was just curious if my understanding is correct.

Thanks.

amyjayne27

Hi Steve,

Depreciation is a non cash expense. So the answer is correct, it would not ultimately affect the tax position.

You are correct in saying a higher depreciation charge would result in a lower net profit, but then this depreciation is then effectively 'added back' on the tax return, thus cancelling it out.

Does this make sense?

taraskyn

Hi!
Amy's right. When you come to complete your Tax Return, depreciation is added back onto the net profit as it is not an allowable deduction for tax purposes.
:001_smile:

steve2008

Thanks.

Thinking about it, it wouldn't make sense to allow it as a tax deductible expense as the capital purchase would have already been claimed. Doh.

I assume this is covered in the Indirect Tax module or later ones, I guess I am jumping ahead.