Depreciation is loss in value of a fixed asset such as motor vehicle, machinery, office equipment and computers if any. This is a practice defining an asset and identifying its cost, then grouping the asset according to their similarities for tax purposes. Cost segregation depreciation has many benefits to an individual or a firm due to it tax implication.
The benefit of this practice include gradual cash flow increase, cutting down tax liability, leads to tax deferral and individuals can claim refunds on tax overcharge paid in the previous years without changing their tax return.
There are many techniques that can be used to classify and depreciate the assets, this techniques are sampling technique, scrap value estimation approach, survey approach, detailed engineering and modeling approach.
This effect is good as it cuts down the amount to be depreciated and a firm ends up paying less. To achieve accurate and reliable expenditure segregation the technique used to distribute total outlay to specific asset is very crucial.
This engineering technique has several steps that will be explained below. This approach is also known as detailed expenditure. The method uses the charge of that period of construction and records used for accounting in computing depreciation amount of an asset.
Blueprints, biding documents, contract agreement documents and supplier payment records should be thoroughly investigated and confirmed by a responsible person in the organization. This is necessary to come up with the exact cost of a property and it helps compute unit charge. Identify and apportion certain assets from this project to the suitable classes. The classes can be fixtures, fittings, building, motor vehicles or machinery.
Some firms can also use straight line method or reducing balance methods of depreciating an asset. The straight line basis takes the initial value of a property, removes any residual or scraps value from the initial outlay and then apportions the resultant amount to the useful years of the property.
Scrap value is the amount a property can be sold at or fetch at the end of it useful life. Then reducing balance method is a technique that depreciates an asset yearly. The depreciation charge in the first year reduces the initial outlay of asset in the following year. The asset is depreciated year by year until its economic life is over.
This approach is more suitable for assets that short life span, that is an economic useful life of less than seven years and greater than five years. The cost of these short term asset are added up and then deducted from actual outlay of project.
Depreciation charge is an allowable expense that cuts down taxable income resulting to increase in cash flow after tax. Firms consider tax periods that are shorter since they bring higher tax benefits. Considering value of money, huge tax deductions within short duration is more advantageous to businesses than smaller tax deductions made for longer periods. Bonus depreciation is also part of benefit that one can get as a result of cost segregation. Bonus depreciation is only applicable to specific properties such as fixed asset with useful life of twenty years and more such asset include machinery and other non current asset.
The next step is relating unit charge to specific asset component to verify the total outlay. Reconcile the two expenditures, that is charge from take off and total initial outlay. Then apportion indirect charges to respective properties. This indirect outlays include engineering fees, permit charges and architectural charges. Classify asset with same class lives and calculate their depreciation. This method is the most time consuming but is preferred since it is more accurate.
The benefit of this practice include gradual cash flow increase, cutting down tax liability, leads to tax deferral and individuals can claim refunds on tax overcharge paid in the previous years without changing their tax return.
There are many techniques that can be used to classify and depreciate the assets, this techniques are sampling technique, scrap value estimation approach, survey approach, detailed engineering and modeling approach.
This effect is good as it cuts down the amount to be depreciated and a firm ends up paying less. To achieve accurate and reliable expenditure segregation the technique used to distribute total outlay to specific asset is very crucial.
This engineering technique has several steps that will be explained below. This approach is also known as detailed expenditure. The method uses the charge of that period of construction and records used for accounting in computing depreciation amount of an asset.
Blueprints, biding documents, contract agreement documents and supplier payment records should be thoroughly investigated and confirmed by a responsible person in the organization. This is necessary to come up with the exact cost of a property and it helps compute unit charge. Identify and apportion certain assets from this project to the suitable classes. The classes can be fixtures, fittings, building, motor vehicles or machinery.
Some firms can also use straight line method or reducing balance methods of depreciating an asset. The straight line basis takes the initial value of a property, removes any residual or scraps value from the initial outlay and then apportions the resultant amount to the useful years of the property.
Scrap value is the amount a property can be sold at or fetch at the end of it useful life. Then reducing balance method is a technique that depreciates an asset yearly. The depreciation charge in the first year reduces the initial outlay of asset in the following year. The asset is depreciated year by year until its economic life is over.
This approach is more suitable for assets that short life span, that is an economic useful life of less than seven years and greater than five years. The cost of these short term asset are added up and then deducted from actual outlay of project.
Depreciation charge is an allowable expense that cuts down taxable income resulting to increase in cash flow after tax. Firms consider tax periods that are shorter since they bring higher tax benefits. Considering value of money, huge tax deductions within short duration is more advantageous to businesses than smaller tax deductions made for longer periods. Bonus depreciation is also part of benefit that one can get as a result of cost segregation. Bonus depreciation is only applicable to specific properties such as fixed asset with useful life of twenty years and more such asset include machinery and other non current asset.
The next step is relating unit charge to specific asset component to verify the total outlay. Reconcile the two expenditures, that is charge from take off and total initial outlay. Then apportion indirect charges to respective properties. This indirect outlays include engineering fees, permit charges and architectural charges. Classify asset with same class lives and calculate their depreciation. This method is the most time consuming but is preferred since it is more accurate.
No comments:
Post a Comment