Tax-allowable depreciation
Tax-allowable depreciation creates tax savings when the deduction can be used against taxable profits. It is distinct from accounting depreciation and may follow a different timing pattern. Calculate the tax deduction using the specified basis, then multiply by the applicable tax rate to find the saving; place the cash flow at the tax payment date, which may be delayed. An appraisal must consider whether losses can be relieved and whether disposal creates a balancing adjustment. The exam's simplifying assumptions must not be presented as universal tax law.
Worked example
A machine costing $100,000 receives a 25% first-year reducing-balance allowance under the question's assumptions. The allowance is $25,000. At an illustrative 30% tax rate, usable tax saving is $7,500; if tax is paid one year in arrears, place that saving at the corresponding later date.
Common mistake
Treating the full allowance as a cash inflow, or using accounting depreciation in place of the specified tax deduction.
Where it appears in your exams
| Qualification | Exam | Relationship | Period |
|---|---|---|---|
| ACCA | AFM | Direct | September 2026–June 2027 |
| ACCA | FM | Direct | September 2026–June 2027 |