What is depreciation? Methods, examples and NZ tax

Published Tuesday 21 April 2026

Table of contents

• What is depreciation?
• Understanding revenue and capital expenses
• Purpose of depreciation: three main functions
• What can be depreciated?
• When not to depreciate
• Choosing a depreciation schedule
• Methods of calculating depreciation
• Examples of depreciation in practice
• Recording depreciation in your accounting system
• Implementing depreciation in your business
• FAQs on depreciation

Key takeaways

• Recognize the difference between capital and revenue expenses before claiming any costs: if a purchase helps your business for more than one year, it's a capital expense that you spread over time through depreciation, not an immediate deduction.
• Choose your depreciation method based on how your asset loses value: use straight-line for assets that wear out steadily, diminishing value for assets that lose value quickly when new, and units of production for assets where wear depends on usage rather than age.
• Use IRD's official depreciation rates and check current rules before filing, as rates can change, for example, the low-value asset threshold is now $1,000, and non-residential buildings returned to a 0% depreciation rate from the 2025 income year.
• Set up accounting software with a fixed asset register to automate depreciation calculations and keep your profit and loss statement, balance sheet, and tax records accurate without manual data entry.

What is depreciation?

Depreciation is the process of spreading the cost of a business asset over its useful life. Instead of recording a $2,000 computer purchase all at once, you claim a portion of that cost each year, although from 22 May 2025, you can claim 20% of the cost of new assets as an immediate expense and depreciate the remaining 80%.

This method reflects how assets lose value through use, wear, and obsolescence. Accounting software automates these calculations, though working with an accountant ensures you choose the right approach.

Understanding revenue and capital expenses

Before you can depreciate an asset, you need to know whether it's a capital expense or a revenue expense. This distinction determines how you claim the cost on your tax return.

Revenue expenses are day-to-day costs you can deduct immediately. These include office supplies, utilities, rent, and repairs that keep assets working.

Capital expenses are purchases that provide value over multiple years. These include equipment, vehicles, buildings, and major improvements. You spread these costs over time through depreciation.

Here's a quick test: if the purchase will help your business for more than one year, it's likely a capital expense that you'll depreciate.

Purpose of depreciation: three main functions

Once you've identified your depreciable assets, understanding why depreciation matters helps you use it effectively. Depreciation helps you track true business costs, reduce your tax bill, and maintain accurate asset values. Here's how each function works:

1. Depreciation as an expense (cost of doing business)

Depreciation as an expense ensures your profit and loss statement reflects the true cost of using business assets. Assets wear out and need replacement, so depreciation captures this as a real business cost.

Without depreciation, you'd underestimate expenses and overestimate profits. Recording this depreciation expense gives you a more accurate picture of business performance.

Download the free P&L template to track all your costs.

2. Depreciation and tax

Depreciation reduces your tax bill by letting you deduct asset costs over time. In New Zealand, these deductions lower your taxable income each year you claim them.

Key tax rules to follow:

• Use IRD's specific depreciation rates for each asset type (rates can change, as they did for buildings between 2011 and 2021).
• Follow prescribed timeframes for each asset category.

Consult your accountant to stay compliant with current tax rules.

3. Valuing your business (depreciation on the balance sheet)

Depreciation affects your business valuation by reducing the recorded value of assets on your balance sheet. As assets age, your business may be worth less to potential buyers or lenders.

Key valuation impacts:

• Balance sheet accuracy: depreciated values reflect current worth, not original purchase prices.
• Loan security: banks may offer less financing as asset values decrease.
• Sale price: buyers consider current asset conditions, not historical costs.

Update your fixed asset register regularly to maintain accurate records. Download the free balance sheet template to track your assets.

What can be depreciated?

Depreciable assets are items that provide business value over multiple years. Only certain business purchases qualify for depreciation.

Here's how to tell the difference:

• Immediate deductions: office supplies, utilities, and rent (claim in the purchase year)
• Depreciable items: equipment, vehicles, buildings, and furniture (spread over useful life)

What are business assets?

Business assets are items your business owns that have value and help generate income. They range from everyday items like computers and tools to larger investments like vehicles and buildings.

Assets differ from expenses in one key way: assets provide value over multiple years, while expenses are consumed quickly. A laptop you'll use for three years is an asset. The paper you print on is an expense.

What are fixed assets?

are items that generate business income for more than one year. They form the foundation of your business operations.

Common fixed assets include:

• physical assets like tools, machinery, computers, vehicles, and buildings
• intangible assets like patents, copyrights, and trademarks (amortised rather than depreciated)
• leased items where some lease agreements qualify for depreciation treatment

Specific rules apply to certain assets. For example, a non-residential building with a useful life of 50 years or more has different requirements, and from the 2025 income year, its depreciation rate has returned to 0%.

Items you cannot depreciate:

• Land: doesn't lose value over time.
• Stock and inventory: doesn't qualify because it's handled through separate inventory accounting methods.

When not to depreciate

Depreciation isn't always required or beneficial. Here are situations where you might choose not to depreciate an asset:

• Low-value assets: items under $1,000 can often be expensed immediately rather than depreciated, as the low value asset threshold was reset to this amount from 17 March 2021 onwards.
• Short-term use: assets you'll dispose of within one year don't need depreciation.
• Pooled assets: some low-value items can be grouped and depreciated together at a set rate.

IRD allows flexibility in how you handle certain assets. Check their guidelines or talk to your accountant to decide what works best for your situation.

Choosing a depreciation schedule

A depreciation schedule determines how long you'll spread an asset's cost across your books. IRD provides standard depreciation rates for most business assets, which simplifies this process, though their rate finder and calculator can only be used for assets acquired on or after 1 April 2005.

Follow these steps to set your schedule:

1. Estimate useful life: computers typically last three–four years, while factory equipment may last 10–30 years.
2. Apply IRD rates: follow official depreciation schedules for your asset type.
3. Adjust when needed: write down to zero if assets are lost, stolen, or damaged.
4. Account for disposals: record sales, trades, or asset combinations.

Methods of calculating depreciation

Depreciation methods determine how you calculate the value an asset loses each year. New Zealand businesses typically choose between three approaches, each suited to different asset types and needs.

Straight line depreciation

Straight line depreciation spreads an asset's cost evenly across its useful life. This method gives you predictable, consistent annual expenses and works well for assets that wear out steadily over time.

Example: A $10,000 machine with a five-year lifespan depreciates $2,000 per year ($10,000 ÷ 5 years = $2,000 annually).

Diminishing value depreciation

Diminishing value depreciation applies a fixed percentage to an asset's remaining value each year. This method suits assets that lose value quickly when new, then more slowly over time.

Example: A $10,000 asset at 20% diminishing value depreciates $2,000 in year one, then $1,600 in year two (20% of the remaining $8,000 value).

Units of production depreciation

Units of production depreciation bases depreciation on actual usage rather than time. This method suits assets where wear depends more on activity than age, such as vehicles or manufacturing equipment.

Example: A delivery truck expected to travel 200,000 km over its life depreciates based on annual kilometres driven. If it travels 40,000 km in year one, it depreciates 20% of its value (40,000 ÷ 200,000).

Examples of depreciation in practice

Real examples make depreciation easier to understand. Here's how it works for a common business purchase.

Imagine you run a cafe and buy a coffee machine for $10,000. You expect it to last five years, after which it will have no value.

Using the straight-line method, you depreciate the machine by the same amount each year: $10,000 ÷ 5 years = $2,000 annually. Each year, you record this $2,000 expense, and the machine's book value decreases by that amount.

Recording depreciation in your accounting system

Recording depreciation keeps your financial statements accurate and your tax claims compliant. Here's where depreciation appears in your books:

• Profit and loss statement: the depreciation expense reduces your taxable profit.
• Balance sheet: the asset's recorded value decreases over time.

You track these entries in a fixed asset register, which lists all your assets and their depreciation. Accounting software simplifies this process by automatically calculating and posting the correct amounts, so your records stay up-to-date without manual data entry.

Implementing depreciation in your business

Getting started with depreciation is simpler than it appears. Modern accounting software handles the calculations automatically once you set up your asset schedules.

Follow these steps to implement depreciation in your business:

1. Check IRD schedules: find the official depreciation rates for your asset types.
2. Set up your software: configure your accounting system to calculate depreciation automatically.
3. Review monthly: check depreciation entries as part of your regular bookkeeping.
4. Get help when needed: consult an accountant for complex assets or unusual situations.

This approach keeps your records accurate while helping reduce your tax bill.

With the right tools, you can run your business, not your books. See how simple it can be to manage your finances and track depreciation when everything is in one place. Get one month free.

FAQs on depreciation

Here are answers to common depreciation questions from small business owners.

How does depreciation work in New Zealand compared to other countries?

In New Zealand, you can choose between the diminishing value or straight-line methods. IRD provides recommended depreciation rates for different asset types, so follow their guidelines to stay compliant.

What happens if I sell an asset I've been depreciating?

Compare the sale price to the asset's book value (original cost minus depreciation claimed). Selling for more than book value may create a taxable gain; selling for less may let you claim a loss. This is called a wash-up calculation.

Can I change my depreciation method after I've started?

Once you choose a depreciation method for an asset, you must stick with it for that asset's life. Consistency matters for accurate reporting, so talk to an accountant if you're unsure.

What's the difference between depreciation and amortisation?

Both spread an asset's cost over time, but they apply to different asset types. Depreciation covers tangible assets like vehicles and machinery. Amortisation covers intangible assets like patents, copyrights, and software licences.

When should I choose straight-line vs. diminishing value depreciation?

Choose straight-line for assets that wear out steadily over time, like office furniture. Choose diminishing value for assets that lose value quickly when new, like computers or vehicles. Your accountant can help you decide based on your specific assets and tax situation.

Do I need special software to track depreciation?

You don't need special software, but it helps. Manual tracking with spreadsheets works but is time-consuming and error-prone. Accounting software with a built-in fixed asset register automates calculations and keeps you compliant.