Do you know what depreciation is? It is a concept of recognizing the assets that decline in value over time and spread their cost over their useful life. Depreciation is also known as a methodical way to write off the cost of a fixed asset a little at a time, over the course of its long-term life. This is why your financial approach has to be on point and you need to understand all the key mistakes that you’ve been (possibly) making with depreciation thus far.
What is an asset and which type of assets depreciate?
If you have a capital asset, you have an item that can have a good future & amazing economic perk or benefit, meaning that it has to be looked into at all times. Capital assets can be tangible (such as equipment and buildings), or intangible: these are specific & unique trademarks.
Depreciation can be applied to your tangible asset or fixed asset. Fixed assets tend to be higher-value items, but for bookkeepers, everyone will set value within their own level of experience and preference.
Depreciation in business
A business can depreciate any fixed asset except land at any given moment. You can have any type of asset within your name or your company. This applies to everything from buildings to furniture items. One of the biggest companies Coca-Cola recorded more than $1 billion in depreciation expenses a couple of years back. Your final price point will vary and depend based on the size of your company.
Book Depreciation vs. Tax Depreciation
A company may calculate the depreciation of its fixed assets differently and in its own system than they would do for tax reports.
- Book depreciation: is also known as a non-cash expense. It is the final amount of money that’s been recorded in a company’s general ledger.
- Tax depreciation: it also refers to the way a company works with your income tax return.
The IRS also sets guidelines for your threshold value. You should have a good bookkeeper as a company who is going to solve this issue or any complications.
1. You are escalating rent
Lessors often offer financial incentives to solicit a lessee into entering a rental contract. This is also known in the system as free rent that you can get either at the beginning or end of the lease arrangement. You need to divide the leases rent payment over the upcoming number of months. Any difference between payments and expenses is known as either a current or non-current asset or liability on the balance sheet.
2. Capitailiation of overhead cost
Many times only direct costs are put in the inventory. These apply to labor and raw materials. The overhead is typically not associated or applied incorrectly to the basis of the value of inventory. If you overlook or skip doing the overhead calculation, you might be facing issues with your large inventory at the end of the year and on top of your balance sheet.
3. Accrued vacation
Your next vacation or Paid-Time-Off is where you can use your leftover period by the end of the year. This is what most companies have to offer. In case you do not use it you might get paid for your unused vacay time by the fund that’s made for these types of events. Oftentimes just verbal policy is enough to trigger an employee’s potential right to compensation of vacation or PTO that has not yet been accrued.
4. Unclear tax
If there are any unclear or uncertain tax issues, here are the two steps that you can take:
More than 50% of tax position will be sustained under an IRS audit, or your tax position is measured at the largest amount of tax benefit/expense that is greater than 50% likely.
If the company does not register to do business and does not register to file tax returns in these states, they would not preclude the GAAP financial statements from accruing the tax liability and disclosing it on the financial statements.
5. Not working on legal limits
When assigning a useful life to an item of PPE, you have to take a look at its legal limits. The future economic benefits embodied in an asset are consumed by an entity principally through its use. You also need to understand its technical factor or commercial factor. Here is what you should keep an eye out for:
- Usage is assessed by reference to the asset’s expected capacity or physical output
- The physical wear and tear
- Level limits of the assets
A common error is to ignore legal limitations and incorrectly depreciate assets over the longer economic life, rather than the shorter lease period.
6. Residual value can be wrong when determining the depreciable amount
The basic requirement is that the ‘depreciable amount’ of an asset with a finite useful life is depreciated on a systematic basis over its useful life. This applies to the estimated amount that an entity would currently obtain from disposal of the asset, shortly and just after deducting the cost of the disposal.
Often times companies will also have an issue with annual depreciation. This is why:
- Estimated disposal costs need to be deducted. This will lead to a lower residual value and higher depreciation charge.
- Once you assume that the asset is already used, this will result in lower residual value and higher depreciation charges.
How to correct and work on all of this?
If you wish to work on all of the above and you need a bit of help or assistance when it comes to your taxes, make sure that you check out capitalclaims.com.au. On their site & with their help, you will get a free personalized estimate of your depreciation claims. Simply fill out your details, name & phone number, as well as the type of property that you’re working with. Their total value of deducted assets thus far is $9B+, and they have had 35k+ customers since 2008, meaning that you’re going to be in safe hands.