Consideration of Tax

Depreciation is treated as a deductible expense when computing taxable profit. This means a business can reduce its tax liability by claiming depreciation on its fixed assets. However, the amount of depreciation allowed for tax purposes is not necessarily the same as the depreciation charged in the financial statements.

The Income Tax Act prescribes its own rates and methods for calculating depreciation. These tax rules are often different from the accounting policies a business follows for preparing its Profit & Loss Account. For example, a company might use the Straight Line Method for its books but be required to use the Written Down Value method at a specific rate for tax purposes. This difference creates a permanent distinction between the depreciation shown in the Profit & Loss Account and the depreciation claimed as a deduction in the tax return.