Depreciation for Business Assets
📊 Spreading the Cost of Big Purchases
When a business buys something expensive that will last for years, like a vehicle, machinery, or computers, it usually cannot claim the whole cost as an expense in the year it buys it. Instead it claims a portion of the cost each year over the asset useful life. That yearly claim is called depreciation. It reflects the idea that the asset is gradually used up and loses value as it earns income for the business.
Why Not Claim It All at Once
- The asset benefits the business over several years, not just one.
- Matching the cost to the years of use gives a truer picture of profit.
- Tax rules generally require capital assets to be depreciated, not expensed immediately.
📝 How Depreciation Is Calculated
Depreciation uses a rate set for each type of asset, applied using one of two main methods. The rate reflects how quickly that kind of asset is expected to wear out or become outdated.
The Two Main Methods
| Method | How it works |
|---|---|
| Diminishing value | A fixed rate applied to the reducing book value each year, so the deduction is larger early on and smaller later |
| Straight line | An equal amount each year, spreading the cost evenly over the asset life |
Under diminishing value, you depreciate a percentage of the remaining value, so the claim shrinks each year. Under straight line, you claim the same dollar amount annually. The two methods have different rates designed to give broadly similar total deductions over the asset life, just in a different pattern.
The exact rates depend on the asset and are set by Inland Revenue, and they change over time, so check the current rates. Our Depreciation Calculator can help you model both methods.
💰 Low-Value Assets and Pools
Low-Value Assets
Not every purchase has to be depreciated. Assets that cost below a low-value threshold can usually be fully deducted in the year of purchase, rather than depreciated over years. This saves small businesses the hassle of tracking depreciation on minor items. The threshold is set by Inland Revenue and has changed over time, so check the current figure.
Book Value and Adjustments
As you depreciate an asset, its book value, also called adjusted tax value, falls each year. This running value matters, because it is what you compare against the sale price when you eventually dispose of the asset. Keeping accurate records of each asset cost, depreciation claimed, and current book value is essential.
💡 Selling an Asset and Getting It Right
Depreciation Recovery and Loss on Sale
When you sell a depreciated asset, you compare the sale price with its book value. If you sell it for more than its book value, it means you claimed too much depreciation, and the excess is clawed back as taxable income, known as depreciation recovery. If you sell it for less than its book value, you may be able to claim the shortfall as a loss.
Keep Good Records
Depreciation only works correctly if you track each asset properly: its purchase cost and date, the method and rate, depreciation claimed each year, and the current book value. A fixed asset register, even a simple one, makes year-end and any sale straightforward. See our guide on keeping records for tax.
Model the numbers with the Depreciation Calculator. Final word: depreciation spreads a long-life asset cost over the years it is used, claimed as a yearly deduction at set rates. Track book values carefully, watch the rules for buildings and low-value assets, and remember that selling above book value can trigger a recovery charge. This is general information, not tax advice; check current rates and rules.
🎯 Test Your Knowledge
Quiz on Depreciation for Business Assets (20 Questions)
Related guides
- Business Structure Basics, a related guide in the same area.
- GST Registration for Small Business, a related guide in the same area.