Depreciating office equipment is a great way for SMEs in New Zealand to reduce taxable income, but it’s easy to make costly mistakes. In this blog, we’ll explore common mistakes SMEs make when depreciating office equipment and how to avoid them, ensuring you maximise your tax savings and stay compliant with New Zealand’s tax laws.
1. Using Incorrect Useful Life Estimates
In New Zealand, office equipment should be depreciated over its expected useful life as defined by the Inland Revenue (IRD). However, some SMEs fail to check the IRD’s guidelines and either overestimate or underestimate the useful life of their assets. For instance, computers may have a useful life of four years, while office furniture could last longer. Using incorrect estimates may lead to tax deductions being over- or understated.
Tip: Always refer to the IRD’s depreciation rate finder to confirm the correct useful life for each asset.
2. Forgetting to Update Depreciation Schedules
Once you start depreciating office equipment, it’s essential to update your depreciation schedules annually. Many SMEs neglect this step, resulting in discrepancies between actual asset value and what’s recorded in financial statements. This can cause issues during audits and when preparing financial reports.
Tip: Set up reminders in your accounting software (e.g., Xero or MYOB) to review and update depreciation schedules at the end of each financial year.
3. Not Claiming Low-Value Asset Write-Offs
In New Zealand, assets costing less than $1,000 can often be fully expensed in the year of purchase instead of being depreciated over time. Many SMEs miss out on this benefit by mistakenly including low-value assets in their depreciation schedules, delaying tax savings that could be claimed immediately.
Tip: Separate low-value office equipment and claim them as an immediate deduction where applicable to maximise your tax savings.
4. Incorrectly Calculating Depreciation on Upgraded Equipment
If you upgrade or improve office equipment, the new value needs to be reflected in your depreciation calculations. Failing to adjust for these changes means you may continue to depreciate the original value, missing out on the full tax benefit of the upgraded asset.
Tip: Whenever you upgrade or improve office equipment, ensure you recalculate the depreciation based on the new adjusted value and useful life of the asset.
5. Not Taking Advantage of Pooling for Similar Assets
New Zealand tax law allows SMEs to pool certain office equipment with similar useful lives and depreciate them as a group. This can simplify your depreciation calculations and provide greater flexibility when dealing with individual assets in the pool that are sold or disposed of. However, many SMEs either aren’t aware of this option or don’t use it effectively.
Tip: Consider pooling low-value or similar office equipment together to streamline your depreciation process and reduce administrative work.
6. Depreciating Fully Expensed Items
Some SMEs continue to depreciate office equipment that has already been fully expensed or written off. This leads to inflated expenses and can trigger red flags during tax audits.
Tip: Ensure that once an asset is fully depreciated, it’s removed from your active depreciation schedule to avoid duplicating expenses.
7. Neglecting to Account for Asset Disposal
When SMEs sell, dispose of, or scrap office equipment, they often forget to adjust the depreciation schedule. This can result in continuing to claim depreciation on assets no longer owned.
Tip: Always remove disposed assets from your books and report any resulting gain or loss on disposal in your financial statements.
8. Applying Depreciation Rates Incorrectly
New Zealand’s Inland Revenue Department (IRD) provides specific depreciation rates for different types of assets. Using the wrong rate (e.g., applying a rate for furniture to computers) can result in inaccurate depreciation amounts.
Tip: Always verify the correct depreciation rate from the IRD’s depreciation rate finder for each type of office equipment.
9. Not Considering Partial-Year Depreciation
When office equipment is purchased partway through the year, some SMEs mistakenly depreciate the asset for the full year instead of only for the period it was in use, leading to overstatement of depreciation expenses.
Tip: Use partial-year depreciation methods, such as the straight-line method, to account for the correct portion of the year the equipment was in service.
10. Failing to Update for IRD Depreciation Changes
The IRD periodically updates its depreciation rules and rates. Failing to keep up with these changes can mean SMEs miss out on tax benefits or end up using outdated rates.
Tip: Stay informed about the latest IRD updates on depreciation rules and adjust your calculations accordingly.
11. Ignoring the Impact of Software on Equipment Depreciation
For equipment like computers, the software installed may need separate depreciation treatment. Many SMEs combine software and hardware depreciation, which can lead to incorrect calculations, especially for expensive or customised software.
Tip: Separate software from hardware purchases and apply the appropriate depreciation treatment for each.
12. Not Factoring in the Impact of Repairs vs. Improvements
Repairs are typically expensed immediately, while improvements should be capitalised and depreciated. SMEs often confuse the two, either capitalising repairs or expensing improvements, leading to inaccurate financial reporting.
Tip: Review the nature of the expenditure carefully to determine if it should be expensed immediately or capitalised and depreciated.
13. Overlooking Leasehold Improvements
If you lease office space and make improvements (e.g., installing office partitions), these improvements must be depreciated over time. Many SMEs forget to account for leasehold improvements when calculating depreciation.
Tip: Include leasehold improvements in your depreciation schedule, especially if significant modifications are made to rented office space.
14. Incorrectly Depreciating Personal Equipment Used for Business
SME owners sometimes use personal equipment (e.g., home computers) for business purposes and incorrectly depreciate the entire value, even though it’s not used solely for the business.
Tip: Only depreciate the business-use portion of personal office equipment. Use a log or time-based calculation to ensure the correct percentage is applied.
15. Not Considering the Impact of Asset Revaluation
In cases where office equipment significantly increases in value, some SMEs fail to revalue the asset and continue depreciating based on the original cost. This results in understated asset values on the balance sheet.
Tip: Revalue office equipment when necessary, especially if the value has increased significantly, and adjust depreciation calculations to reflect the updated value.
The content in this blog is intended to provide general insights and should not be regarded as professional advice. Each business situation is unique, and we recommend consulting with a professional for specific guidance. At Black Arrow Business Studio, we specialise in accounting and consulting services designed to support your business’s growth and success. Feel free to contact us for expert advice and customised solutions.
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