Tax depreciation is a tax deduction that reduces the taxable income of a business or individual.

The basic principle of tax depreciation is that property, such as equipment and vehicles, wears out over time, so you can deduct some of its value from your taxable income.

For example, if you earn $50,000 from your job but spend $30,000 on office equipment and supplies for your home-based business, you have a taxable income of only $20,000. If you spend less than your total income on goods and services that are used for business purposes, then the difference is subtracted from your income for tax purposes.

Tax depreciation rules vary depending on whether you are claiming it as an individual or as a business owner. In both cases, there are plenty of common mistakes to avoid when claiming tax depreciation. Before moving on to the mistakes, it is important to understand the significance  of tax depreciation report in Melbourne, if you are based in Melbourne. An understanding of the process can help avoid mistakes.

Mistakes to avoid when claiming tax depreciation

Claiming the wrong type of property – You can’t claim tax depreciation on private use assets. For example, if you live in your home and rent out a room, you can’t claim tax depreciation for that room.

Failing to keep records – You need records for all depreciating assets for at least five years after the year they were first used or installed ready for use. If you sell an asset, it’s up to you whether to keep these records or give them to the purchaser. However, if asked by an ATO auditor, you must be able to produce these records within 21 days.

Claiming too much – The maximum allowable deduction for most depreciating assets is only half of what’s allowed in previous years. This means that if you claimed $500 per annum in previous years but now only get $250 per annum then you’ll need to recalculate your deductions using the formula specified by the ATO.

If you claim an amount that’s too high, you’ll pay more tax than necessary. If you claim too little, you may be entitled to a tax refund or be eligible for other deductions.

Before claiming an asset on your tax return, be sure it’s actually eligible for depreciation. Don’t assume that just because you bought something new it is eligible for depreciation.

It is in your own interest to make sure that all the items you intend to claim are included on the tax depreciation schedule, or you might end up with a big tax bill which could have been avoided. Failure to follow correct procedures can be a pitfall for many people and it’s important to ensure that you check the parameters before submitting a claim. Although mistakes are unlikely to happen if you employ an experienced accountant, there are still lots of traps for the unwary.

It is always preferable to seek professional help when it comes to tax depreciation so that it becomes easier for you to manage things.