Microsoft Dynamics AX 2012 has the ability to utilize multiple Depreciation Books for calculating both book and tax depreciation of fixed assets. Under Canadian rules, many companies do not bother with calculating tax depreciation due to the fact that Microsoft Dynamics AX 2012 calculates depreciation by asset and the Canada Revenue Agency (CRA) uses Capital Cost Allowance (CCA) pools for tax depreciation. However, companies with U.S. operations may want to save some costs by calculating tax depreciation due to the fact that in the U.S. tax depreciation is calculated by asset.
Some of the complexities that exist with double declining balance depreciation under Internal Revenue Service (IRS) rules include:
- Calculation of double declining balance – if life is 5 years, rate is 40%
- Half year depreciation charged in the year of acquisition
- When straight line depreciation is greater than double declining depreciation, must switch to straight line
Setup in Microsoft Dynamics AX 2012
Create two Depreciation Profiles. These profiles will be used to manage the tax depreciation as specified above.
Navigate to: Fixed Assets ? Setup ? Depreciation ? Depreciation Profiles
- Create Profile: Straight Line – Life Remaining
- Create Profile: 200% reducing balance
Create a Double Declining Value Model with an Alternative depreciation profile.
Microsoft Dynamics AX 2012 will use this alternative depreciation profile when straight line depreciation is greater than the double declining calculation.
Navigate to: Fixed assets ? Setup ? Value models
Associate the Value model with a Fixed asset group by clicking on Fixed asset groups in the Value model.
Set up the Depreciation convention as Half year and set the default life for the asset.
Per IRS guidelines, the system will automatically switch from Double Declining Balance depreciation to Straight Line – Remaining Life at the point when Straight line is greater than the Double declining balance calculation.
The half year rule will also be applied for the year of acquisition:
- If an asset is acquired prior to July 1, the system prorates half year’s depreciation over the remaining periods for that year. For example, if purchased in March, 50% depreciation is spread out over 10 months.
- If an asset is acquired after July 1, the system prorates half year’s depreciation over the remaining periods for that year. For example, if purchased in October, 50% depreciation is spread out over 3 months.
I hope you take advantage and implement this simple depreciation tip to minimize your tax impact and help save money for your U.S. operations!
As a finance executive, Sheldon has extensive experience in strategic planning and analysis, financial management and corporate accounting. Sheldon is a leading Microsoft Dynamics AX consultant with project management and ERP implementation expertise.