Sometimes known as accumulated depreciation, depreciation allowances are expenses that are periodically written off as a means of recognizing the loss in value of some type of fixed asset. In many cases, the amount of the allowances are the same or very similar for each year of that asset’s useful life. Properly calculating the allowances for losses due to depreciation make it possible to claim tax breaks that help to lower the overall tax obligation for the calendar year.
In many nations, governmental agencies that focus on revenue and the collection of taxes issue guidelines for depreciation allowances. It is not unusual for those agencies to provide schedules or tables to aid taxpayers in determining the amount of annual depreciation that is allowed on a given fixed asset, such as a building or a vehicle. Typically, the allowances are based on the initial cost of the assets minus any projected salvage value. Those amounts are then divided among the years of useful life, arriving at a fixed amount of depreciation that can be claimed each calendar year.
While one of the main functions of depreciation allowances is to account for the depreciation that is anticipated to occur as fixed assets undergo normal wear and tear, the calculation of the allowances can also be helpful in determining sales prices on used assets. For example, if the owner of a three-year-old vehicle determines to sell the asset, he or she would consider subtracting those three years of depreciation claimed on tax forms from the initial cost of that vehicle. That figure would then be compared to current determinations regarding the market value of the vehicle as part of the criteria for determining the asking price for the used car or truck. While other factors like the general condition of the vehicle and consumer demand for that make and model would also influence the asking price, taking depreciation allowances for the years that the vehicle was in the possession of the owner serves as a good place to begin calculating the sale price.
Since governmental revenue and tax agencies may revise their tables or schedules for calculating depreciation from time to time, this means that depreciation allowances could possibly change from one year to the next. For this reason, it is important to identify any changes to the table that occur before filing the annual return. Doing so makes it possible to adjust the amount claimed to conform to the current depreciation allowances within the table and receive the highest tax credit possible.