I use GnuCash to manage my personal investments and have accounts that look a bit like this (sorry, I'm writing this on my mobile):

  • Fixed Assets
    • Property 1
    • Accumulated Depreciation
  • Income
    • Rent
  • Expenses
    • Depreciation charges
  • Equity

Every year at tax time I get some depreciation charge in my Accumulated Depreciation and Depreciation Charges accounts.

However, this is only part of the picture. I live in a jurisdiction where depreciation can be deducted against my personal income, such that I benefit from that depreciation charge. This additional benefit (which can be substantial) is not reflected in the above accounts, and I don't want to start including my personal income as it will complicate my accounts (I want these accounts only to contain the investments and the benefit I derive from them).

What is the correct accounting treatment for reflecting this additional benefit?

  • 1
    "negatively geared against my personal income" can you explain this more? How is this different than a deductible expense? – D Stanley Oct 28 '19 at 12:53
  • @DStanley sorry poor use of slang. I've removed that wording and replaced it with deduction. You're right in that it's the same thing. – quant Oct 28 '19 at 21:43
  • then I think you already have the right accounting treatment. Or are you talking about the tax savings from that deduction? – D Stanley Oct 28 '19 at 21:52
  • @DStanley yeah that's right. I'm effectively left with a financial benefit of the asset (the tax savings) that are not being reflected in the income of my investment. – quant Oct 29 '19 at 2:25

It's not quite precise to say that you're benefiting from depreciation. Depreciation is a real expense. It reflects a decrease in the market value of your asset. Expenses decrease income, which decreases tax, but paying less tax because you're making less money isn't a good thing.

Depreciation schedules are in some sense a legal fiction. For many classes of assets, there is an expense in holding these assets in that the value of the assets decrease. This decrease can be variable and difficult to calculate exactly. Because of this, many jurisdictions allow you to simply take a fixed schedule, regardless of whether that is the exact amount of depreciation. So if the amount that you're allowed to "pretend" the value of the asset decreased is significantly more than the amount that the value actually decreased, you will have less taxable income than otherwise. But all of this differential is eventually recaptured: depreciation reduces the cost basis of the asset, so if you ever realize a resale value that exceeds the "pretend" value, that is treated as a profit, and will be taxed. For instance, suppose you buy a car for $40k, you claim $30k in depreciation, and you sell it for $15k. Since there was supposedly only $10k of value left in the car, the other $5k is taxable income.

So being able to claim statutory depreciation rather than "real" depreciation is useful only to the extent that it differs from the "real" depreciation, and only to the extent that it is useful to shift your tax burden from this year to later years (which, since the income often comes in a lump sum, moving you into a higher tax bracket, may not, overall, be a benefit).

In addition, if we compare statutory depreciation to not buying the asset at all, the value is likely negative. If instead of buying that car, you had just set the money on fire, then (assuming you were able to justify this as a legitimate business expense), you would have been able to deduct all of the money immediately.

So to calculate the overall benefit, you'll have to somehow get the "real" depreciation (that is, some objective market value), evaluate how much value there is in time-shifting the tax burden, and also figure in the time-shifting effect of the initial purchase.

In short, this is a huge amount of effort and guesswork in pursuit of some mythical "true" value. Accounting isn't about some sort of perfect reflection of ontological reality. It's about methods of recording money flows, with reasonable approximation of reality being one goal, but standardization and understandibility being other important one. Creating ad hoc systems to chase after what you think "should" be included is fraught with problems. In addition, it means keeping two sets of books, one recording what your financial status is according to tax accounting rules, and one according to what you've decided your "true" status is.

Record the depreciation as an expense and move on with your life.

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