When dealing with your company’s income tax, asset depreciation is an important consideration. All assets lose value over time, something that’s often referred to as “wear and tear”, throughout their “useful life”.
Assets have a cost price and a set period of depreciation. For example, a delivery vehicle is written off over a period of four years and computer equipment over three years. SARS provides a schedule of write-off periods for various qualifying assets, which you can access here.
It’s important to note that the asset for which you are claiming a tax deduction must have been used in the production of income, i.e., you can claim a deduction for the van you use to make deliveries, but not for the sportscar you drive on weekends.
If you used the van for both personal and business purposes, then you need to apportion the deduction before you work out the allowance (i.e., divide it into portions: 60% business use, 40% personal use, for example).
Also, important to note is that you cannot claim a deduction on buildings or any other assets that are permanent structures.
Methods for determining the asset depreciation allowance
There are two main methods for determining the allowance:
The most common asset-depreciation method used is the straight-line method. This is a SARS-prescribed rate applied to the cost price of the asset. It allows for a portion of the cost price to be written off as a deduction on your income statement and in your income tax calculation.
Under this method, you can claim the allowance in equal instalments over the prescribed useful life of the asset. For example, you’d claim R25,000 a year for four years on your delivery van.
Diminishing value method
With the diminishing value method, the allowance for a given year is based on how much the asset is still worth (i.e., the cost of the asset, less an allowance for the previous years of assessment).
This means that the amount you can claim every year will change in line with the asset’s value in that particular year.
How to treat small assets
Any asset that costs less than R7,000 may be written off in the year that you bought it.
SARS defines a small asset as one that:
- normally functions in its own right,
- does not form part of a set,
- and costs less than R7,000.
Tools and computers, for example, are considered small items. A table and six chairs do not.
Small business exceptions
Some small businesses will qualify for various accelerated depreciation allowances.
I’ll discuss three below.
Small Business Corporation
Qualifying small businesses may opt for an accelerated depreciation rate of 50-30-20.
This means you can claim:
- 50% of the allowance in the year you buy the asset,
- 30% the following year, and
- 20% in the third year.
This can be a huge tax break for start-up businesses.
To qualify, a company must meet several requirements:
- Turnover of less than R20 million a year
- May not be a personal services provider (unless employing three or more non–connected employees)
- Shareholder must hold shares in his / her personal capacity
- Shareholder may not hold shares in any other private company or close corporation
Renewal Energy Allowance
If you install renewable energy, like solar panels, at your business, you can claim 100% back in the year that the expense occurred.
Section 12B of the South African Income Tax Act makes provision for an accelerated depreciation allowance for renewable energy investments. This adds up to a massive tax break, and those panels will certainly come in handy during the next bout of loadshedding.
There is one caveat. This allowance is only applicable to first-time purchases of renewable energy assets, i.e., if you already use renewable energy, you will be unable to claim this tax break.
How to keep track of your assets and deprecation
There are two ways you can keep track of your assets and asset depreciation.
The manual way: Spreadsheets
Create a spreadsheet with the following information columns:
- Detail and cost price of each asset
- Book value at the begging and end of a specific period
- Depreciation rate
The modern way: Sage Online Accounting
We use the Asset Register module in Sage 50 to automate depreciation calculations and processes, which means our clients’ asset registers are always accurate and up to date.
Asset depreciation is an easy way to reduce your tax bill.
Remember, you need to keep all records relating to your asset (e.g., receipts and purchase agreements) for at least five years, and until the day that you dispose of the asset.
Recommended Next Read
SaaS Financial Management: Driving Growth Through AI
[Ebook] The rise of the virtual accountant and what it means for the finance profession
Discover how the accounting profession has evolved from one of number-crunchers to business and financial consultants.