Calculating Depreciation
There are two methods by which the depreciation of a deductible item may be calculated. The first is called ‘Prime Cost Method’. Using this method, a deductible item is reduced in value by the same amount each year i.e. you can claim the same value in tax deductions each year. For example, if the effective life of an item is 4 years. Over the 4 years, its value will decrease by 25% of its initial installation value each year (Refer to Figure 1)
| Depreciating Asset | Installed Value | Year 1 | Year 2 | Year 3 | Year 4 |
| Deductible Item with effective life of 4 years | $10,000 | $2,500 | $2,500 | $2,500 | $2,500 |
Figure 1 – Prime Cost Example
The second method is the ‘Diminishing Value Method’. This method works off a percentage that is double that of Prime Cost. Returning to the previous example, the percentage decrease would be 50%. However, the decline in value is not calculated off the initial installation value, but rather, off the remaining amount once the decline in value from previous years has been deducted. Slightly confusing, but bottom line is that this method means that a greater value can be claimed in the earlier years, leaving much less for the latter half of the item’s effective life.
| Depreciating Asset | Installed Value | Year 1 | Year 2 | Year 3 | Year 4 |
| Deductible Item with effective life of 4 years | $10,000 | $5,000 | $2,500 | $1,250 | $1,250 |
Figure 2 – Diminishing Value Example
Final Tips and Reminders
Tips and Reminders for Depreciation Schedules
- Do you own an investment property?
- Do you wish to save thousands of dollars annually?
If you answered yes to both, contact QPC&C for a quote today!
Want to know some background information about Depreciation Schedules; including what they are and why they are used, check out our blog post on Depreciation Schedules by clicking here, or in the News tab above.
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