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Good afternoon,
I kept making mistakes in determining whether the starting point of depreciation expense should be on Y0 or Y1 for the calculation of tax relief.
For example: The company has a 31 December year-end. If the asset was purchased on 31/12/20X4, should the depreciation expense be calculated for Y0 or Y1 ?
If you have any tips to remember, please share them with me. I would be grateful.
Thank you.
A lot depends on the individual question at hand. The capital allowances are available to the tax year in question immediately. However, tax is often paid a year in arrears. Similarly an extra year may have to be included to deal with balancing allowance or charge charge incurred when an asset is sold and the tax payment or allowance will not be received for another year.
Dear Mr.John,
Thank you for your response.
In question 111 (Page 41 – Revision KIT Sep 2023 – June 2024)
The question is as follows:
SW Co has a 31 December year-end and pays Corporation tax at a rate of 30%, 12 months after the end of the year to which the cash flows relate. It can claim tax-allowable depreciation at a rate of 25% reducing balance. It pays $1m for a new machine on 31 December 20X4. SW Co’s cost of capital is 10%.What is the present value on 31 December 20X4 of the benefit of the first portion of tax-allowable depreciation?
So my question is:
The KIT’s answer states the depreciation expense will be charged in Y0 so the tax relief will be received in Y1. I don’t understand why, the machine was bought on 31 December 20X4, why the depreciation expense would not be charged in Y1 instead of Y0Please clarify this point for me. Thank you so much !!!
Able to claim tax allowable depreciation of $250000 instantly when they bought the asset. $1,000,000 x 0.75 = $250000. Since tax is not payable for a year relevant amounts have to be discounted. Corporate tax rate of 30% so tax allowable depreciation worth $250000 x 0.3 = $75000. This has to be discounted to show value at end of 20X4. At 10 percent this is $75000/1.1 =$68181.81.
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