Depreciation is one of many types of deductions available for the taxpayer. We previously discussed tax-on-salary deductions, and this week we will discuss depreciation of tangible property and intangible property.
This article is relevant for business taxpayers that wish to reduce their tax liability based on the asset they own. In this post, we will discuss the difference between tangible and intangible property, depreciation and why it’s important, and finally an example of how to calculate depreciation.
Tangible vs Intangible Property
There are two main types of categories of assets called tangible and intangible assets. Tangible assets are typically physical assets or property owned by a company, such as buildings and structures.
Intangible assets don’t physically exist, yet they have a monetary value since they represent potential revenue. An intangible asset could be a patent, copyright, or maybe even a drawing.
What is depreciation and why is it important?
Depreciation is a tax deduction that allows you to recover the cost of assets, whether tangible or intangible, that you purchase and use in your business. In simple terms, we recognize depreciation as the decrease in value of an asset over time, because of normal wear and tear, and are a fundamental part of accounting.
Depreciation helps companies generate tax savings. Tax law allows depreciation to be used as a tax deduction against revenue in arriving at taxable income. The higher the depreciation expense, the lower the taxable income and, therefore, more tax savings.
How to calculate depreciation
Depreciation calculation must take into account many factors, the most important is the asset; tangible or intangible. The depreciation calculation example that we will present to you today is for a tangible asset. Tangible assets under Cambodian law fall into one of four categories:
- Category 1 includes buildings and their basic components. I shall depreciate each asset in this category according to the straight-line method at a rate of 5 percent per year.
- Category 2 includes property having a useful life of up to 4 years and has a straight-line depreciation rate of 25 percent on each property.
- Category 3 shall include property having a useful life of greater than four years through eight years and have a straight-line depreciation rate of 12.5 percent on each property.
- Category 4 shall include all other tangible property and have a straight-line depreciation rate of 10 percent on each property.
This depreciation calculation example is for a fixed asset [class 1 – building]
- The tax depreciation rate is 5% using the straight-line method
NBO [company] owns two buildings and wants to calculate the depreciation:
- Building 1 = $20,000 and Land 1 = $70,000
- Building 2 = $30,000 and Land 2 =$80,000
Answer: Depreciation for category 1 = ($20,000+$30,000) x 5% = $2,500 [Land is not depreciable property.]
How ASEANTAX can help you
Here at ASEANTAX, we know tax calculation is complicated, there are many variables for determining depreciation correctly, and using Microsoft Excel is quite complicated and error-prone. We built ASEANTAX for the taxpayer, for those that want to take control of their taxes while saving time and reducing your costs.
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Disclaimer: This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice.