As a small business owner, you must stay updated with the latest tax rules and regulations. However, many of you may be unfamiliar with or don’t have enough time to stay on top of tax laws. That’s why businesses prefer choosing the best tax accountant near their office by searching online for ‘best tax accountant near me’. Trained and professional accountants keep themselves updated with the latest tax rules announced by the ATO. In this blog post, we’ll help you understand simplified depreciation rules for your small business.
Small Business Depreciation Rules
You can use simplified depreciation rules if your small business’s aggregated turnover is less than:
- $10 million from 1 July 2016 onward
- $2 million for previous income years.
Total turnover depends on the annual turnover of your company and that of any business entities that are connected with your company or are your affiliates. Small business entity simplified depreciation rules include:
- An instant asset write-off for assets that cost less than the limit.
- A general small business pool with simplified calculations to work out the depreciation deduction.
What is an Instant Asset Write Off?
Under the instant asset write-off for eligible businesses, small business owners can immediately deduct the business portion of the cost of an asset if its cost is below the relevant limit for the year the asset is first used or made ready for use.
If a small business has previously claimed an immediate deduction under the simplified depreciation rules for an asset in a prior income year, it can also immediately deduct any additional cost included in the asset’s second element (cost addition). This deduction applies if the amount is:
- The first deductible amount for the second element cost incurred after the income year in which the asset was written off.
- Below the relevant limit for the income year in which the deduction is being claimed.
For the 2023–24 and 2024–25 income years, the relevant limit is $20,000.
Small Business Pool Depreciation
For income years ending on or before October 2020 and after 1 July 2023, you are required to:
- Pool the business portion of most higher-cost assets (those with a cost equal to or above the relevant instant asset write-off threshold) and claim:
- A 15% deduction in the year the assets are first used or installed and ready for use.
- A 30% deduction each subsequent year.
- Deduct the remaining balance of the small business pool at the end of the income year if, at that time (before applying depreciation deductions), the balance is below the instant asset write-off limit.
What If You Choose to Apply the Simplified Depreciation Rule?
If you opt to apply the simplified depreciation rules, you must:
- Use them to calculate deductions for all your depreciating assets, except those that are specifically excluded.
- Apply the complete set of rules, rather than just individual components (like the instant asset write-off).
- Only claim deductions for the portion of the asset used for business or taxable purposes, not for any private use.
Note that a small number of assets are not covered by the simplified depreciation rules, and there is a limit on the cost of passenger vehicles that can be claimed.
What If You Stop Using Simplified Depreciation?
If you no longer use small business depreciation rules or are not eligible to use them, you must check out deductions for your depreciating assets using the general depreciation rules. On the other hand, if you start using the simplified depreciation rules again, you need to adjust the opening pool balance for any depreciating assets that you have started using or installed ready for use since the last time you used the depreciation rules. If you find it difficult to stay updated with the latest tax laws, you can choose accounting services.
Bookkeeping and Record-Keeping
Modern bookkeeping systems usually calculate depreciation, but keep in mind that you have chosen the right settings to apply small business depreciation rules. You need to keep records for 5 years of:
- How did you work out your opening pool balance
- Any change in how much of an asset you use in your business
- any assets you dispose of.
To ensure accurate record-keeping, consider getting in touch with a bookkeeper for small business.
Conclusion
The blog shares information on small business depreciation rules along with eligibility criteria. If you are still confused, you can reach out to Reliable Melbourne Accountants.