Basically, depreciation is the reduction in the value of an asset over time, due to wear and tear or some other kind of material deterioration, or a permanent fall in the market value. Now talking about tax depreciation precisely, it is the depreciation that can be listed as an expense on a tax return for a given reporting period under the applicable tax laws. To calculate tax depreciation in a more handy and precise manner, it is advisable to use the tax depreciation calculator with Capital Claims. There can be a number of causes for tax depreciation like:
Wear and Tear:
As stated earlier, some assets physically deteriorate due to wear and tear in constant use for production. Physical deterioration could be due to movement, strain, friction, erosion in assets like building, machinery, furniture, vehicles, or plants. Wear and tear is general, a very common but primary cause of depreciation.
Lapse of Time:
A lot of assets like copyrights, houses, apartments, or building rents and leasehold properties come to an end with time. After their expiration period, they are considered to be useless and hence their taxes are depreciated.
Non-Use:
The machinery lying idle for years and years without any sort of usage becomes useless with the passing time. With a cherry on the cake, if any sort of machinery is left out in the rains or extreme environment without shelter, makes its price depreciated too.
What Are the Objectives of Tax Depreciation?
To Replace Fixed Assets:
Assets used in a particular business need replacement after the expiry of the previous ones, or due to their wear and tear. Once the assets get permanently and completely unusable, it will be a huge loss in the value of the asset. It is necessary for the assets to be replaced in time. Hence, one of the purposes of implying tax depreciation is the need to collect or accumulate an adequate amount of fund or capital for the replacement of the old assets with new and advanced ones.
To Ascertain the True Working Result:
Assets are one of the most important tools in earning revenues. Hence they are supposed to be of the best quality no matter what is the capital requirement. Huge amounts are spent even during the wear and tear or the long usage of these assets to make sure they are used for as long as possible. When their value decreases, the loss of this fund is supposed to be brought into account to ascertain their true working result.
To State True Position:
The financial position of any business or company can be found out from the balance sheet. The preparation of the balance sheet requires showing the true value of these assets as well the financial condition and position of the business. If the value of assets is not portrayed, it may not help with so. Hence, for the purpose of reflecting the true financial position of a business, depreciation must be applied to the assets’ price and it should be shown on the balance sheet.