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.

                Key Point: Depreciation spreads the cost of a long-life business asset across the years it is used, rather than deducting it all at once. Each year, a depreciation amount is claimed as a tax deduction, reducing taxable profit. Inland Revenue sets depreciation rates for different asset types, and there are rules about low-value assets, the method used, and what happens when you sell.
            

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 The rate reflects how quickly that kind of asset is expected to wear out or become outdated.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.

Identify the asset and its depreciation rate

Choose diminishing value or straight line

Apply the rate to calculate the year deduction

Reduce the asset book value by the depreciation claimed

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.

                Buildings are a special case: The treatment of buildings has changed over the years, including periods where depreciation on certain buildings was not allowed. Because building depreciation rules have shifted, it is one area where checking the current rules, or getting advice, is especially important.
            

💡 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.

Sale price higher than book value: depreciation recovered, taxable

Sale price lower than book value: a loss may be claimable

Sale price equals book value: no adjustment

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.

                When to get help: Depreciation method choices, building rules, and depreciation recovery on sale can get technical. For significant assets or anything unusual, an accountant can make sure you claim correctly and are not caught out by a recovery charge later.
            

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)

1. Depreciation is:

Spreading a long-life asset cost over the years it is used

Claiming the full cost in year one

A type of GST

A savings account

2. A business usually cannot expense the full cost of a long-life asset because:

It benefits the business over several years

It is too cheap

GST applies

It is exempt

3. Each year, depreciation:

Is claimed as a deduction, reducing taxable profit

Increases taxable profit

Is ignored

Adds to GST

4. Depreciation rates are:

Set by Inland Revenue for different asset types

Chosen freely by the business

The same for everything

Set by the bank

5. The diminishing value method:

Applies a rate to the reducing book value, larger deductions early

Claims equal amounts each year

Claims nothing

Doubles each year

6. The straight line method:

Claims an equal amount each year

Claims more each year

Claims everything at once

Uses no rate

7. The two methods are designed to give:

Broadly similar total deductions, in a different pattern

Completely different totals

No deductions

Only one year of deduction

8. As you depreciate an asset, its book value:

Falls each year

Rises each year

Stays the same

Becomes zero immediately

9. Assets below the low-value threshold can usually be:

Fully deducted in the year of purchase

Never deducted

Only depreciated over 20 years

Ignored for tax

10. The low-value threshold:

Is set by Inland Revenue and has changed over time

Never changes

Is set by the business

Does not exist

11. Book value matters most when you:

Sell or dispose of the asset

Buy more stock

Pay wages

File GST

12. Building depreciation rules:

Have changed over the years and need checking

Never change

Are always the same as vehicles

Do not exist

13. If you sell an asset for more than its book value:

The excess depreciation is recovered as taxable income

You claim a loss

Nothing happens

GST is refunded

14. If you sell an asset for less than its book value:

You may be able to claim the shortfall as a loss

You owe recovery tax

You pay GST on the loss

Nothing can be claimed

15. Depreciation recovery is:

Clawed-back depreciation when you sell above book value

A type of refund

A KiwiSaver feature

A GST credit

16. To depreciate correctly you should track:

Cost, date, method, rate, claims, and current book value

Only the purchase price

Nothing

Only the sale price

17. A fixed asset register is:

A record of each asset and its depreciation details

A bank account

A GST return

A type of loan

18. Depreciation rates:

Change over time, so should be checked

Are fixed forever

Are the same worldwide

Do not affect the deduction

19. For significant or unusual assets, it is wise to:

Get accountant help to claim correctly

Guess the rate

Skip depreciation

Expense everything at once

20. The best summary of depreciation is:

Spread an asset cost over its years of use, watching book value and sale rules

Deduct everything in year one

Never deduct asset costs

Only depreciate cheap items

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