Buy an asset that will last your business more than a year and you generally cannot deduct the whole cost in the year you buy it. You claim depreciation instead, spreading the deduction across the asset’s life at a rate Inland Revenue sets for that type of asset. Assets costing $1,000 or less can usually be deducted immediately.
That is the short version. The detail below covers how to find your rate, which calculation method to use, and what changes when the asset is financed rather than paid for outright.
What depreciation actually is
Depreciation is the drop in an asset’s value as it gets used, and the tax system lets you claim that drop as a deduction each year.
The logic is straightforward. A $60,000 truck is not a $60,000 expense in year one, because at the end of year one you still have a truck. What you have actually used up is a slice of its working life. Depreciation is the tax system’s way of measuring that slice.
Inland Revenue treats it as the default, not an option. Businesses are generally required to depreciate their capital assets, and if you decide not to depreciate a particular asset you have to tell IRD. You can claim depreciation on assets you own, assets you lease, and assets bought under a hire purchase agreement.
One distinction worth knowing early: tax depreciation and accounting depreciation are not the same thing. Your accounting software may write an asset down over the life you think it has. Tax depreciation uses the rate IRD publishes for that asset class, whatever your own view. Most small businesses only ever deal with the tax figure, but if your accountant mentions both, that is the difference.
Note for anyone with premises: from the 2024–25 income year the depreciation rate on commercial and industrial buildings was set to 0%. Fit-out and the plant inside the building are treated separately and still depreciate.
How to find the right rate for your asset
There is no single depreciation rate. IRD publishes a rate for every asset class, and the rate for a hydraulic excavator is not the rate for a laptop.
Two places to look:
- The depreciation rate finder. IRD’s online tool. Type in the asset, pick the industry category, and it returns the diminishing value and straight line rates that apply.
- IR265, General depreciation rates. The full published schedule, if you would rather read the tables yourself.
The part that trips people up is the industry category. The same physical asset can sit in different categories depending on what your business does with it, and the rates differ. A vehicle used in a transport operation and the same vehicle in a different industry can land in different places in the schedule. If the asset is expensive and the category is genuinely ambiguous, that is a question for your accountant rather than a guess.
A worked example
Say you buy a $40,000 piece of equipment and the rate finder returns 13% diminishing value.
| Year | Opening value | Depreciation at 13% | Closing value |
|---|---|---|---|
| 1 | $40,000 | $5,200 | $34,800 |
| 2 | $34,800 | $4,524 | $30,276 |
| 3 | $30,276 | $3,936 | $26,340 |
| 4 | $26,340 | $3,424 | $22,916 |
The deduction shrinks each year because it is calculated on the written-down value, not the original price. That closing figure is the asset’s adjusted tax value, and it matters later: if you sell the asset for more than its adjusted tax value, the difference is clawed back as income.
Diminishing value or straight line?
IRD publishes two rates for most assets and lets you pick the method. Both give you the same total deduction across the asset’s life. What changes is the timing.
| Diminishing value (DV) | Straight line (SL) | |
|---|---|---|
| How it works | A percentage of the asset’s current written-down value | The same dollar amount every year |
| Year one deduction | Larger | Smaller |
| Later years | Shrinks each year | Unchanged |
| Suits | A business wanting the deduction early, or an asset that genuinely loses value fast | A business wanting predictable, even deductions |
| Common for | Vehicles, plant, machinery | Fit-out, longer-life assets |
You can use different methods for different assets, and you can switch method at the end of a year, picking up from the asset’s adjusted tax value.
In practice most owner-operators take diminishing value on vehicles and plant. If cash is tight in the first couple of years after a purchase, the bigger early deduction is worth more to you than a tidy even line.
Assets you can write off immediately
If an asset costs $1,000 or less, you can usually deduct the whole thing in the year you buy it rather than depreciating it.
The threshold has moved around, which is why you will still find outdated figures online:
| Period | Threshold |
|---|---|
| Up to 16 March 2020 | Under $500 |
| 17 March 2020 to 16 March 2021 | $5,000 (temporary COVID measure) |
| From 17 March 2021 | $1,000 |
Two things to watch. The test is the cost of the asset, not the cost of the invoice, so buying ten $900 items does not make one $9,000 asset. But if several items are bought from the same supplier at the same time and they only function together, IRD may treat them as one asset. A set of components that only works assembled is the usual example.
What changes when the asset is financed
This is the part most depreciation guides leave out, and it is the part that matters if you are not paying cash.
The short answer: how you finance an asset changes who gets to depreciate it.
| How you acquired it | Do you depreciate it? | What else you deduct |
|---|---|---|
| Bought outright | Yes, on the full purchase price | Nothing further |
| Hire purchase | Yes, on the full cash price from the start | The finance charge, as it is incurred |
| Finance lease | Generally yes, because tax treats it like a purchase funded by a loan | The interest portion |
| Operating lease | No. You do not own it | The lease payments themselves |
The hire purchase row is the one worth sitting with. Under a hire purchase agreement you are treated as the owner for tax purposes from day one, even though the lender holds security and you are paying the asset off over three or five years. So you depreciate the full cash price immediately, not the amount you have paid so far. The interest is deducted separately on top.
For a business buying a $150,000 truck on hire purchase, that means the depreciation deduction in year one is calculated on $150,000, not on the deposit. It is one of the quieter advantages of hire purchase over an operating lease, and it rarely comes up in the sales conversation.
An operating lease is not worse, it is just different. You claim the rentals instead. Which one leaves you better off depends on your tax position, the term, and what you intend to do with the asset at the end. That is a conversation to have before you sign, not after.
Five mistakes we see
- Using the wrong industry category. The rate finder asks what your business does for a reason. Picking the nearest-looking category without checking can leave you on a rate that is wrong for the whole life of the asset.
- Forgetting the asset is still on the books after you sell it. Sell for more than the adjusted tax value and the difference is recovered as income. Businesses that upgrade plant regularly get caught by this more often than they expect.
- Treating the deposit as the depreciable amount on a hire purchase. It is the full cash price. See the section above.
- Missing the $1,000 write-off on small items. Tools, devices and small plant under the threshold can come straight off this year’s income rather than being carried for years.
- Depreciating an asset that is not in use yet. The asset generally has to be used, or available for use, in the business. Something sitting in a crate awaiting commissioning is a question for your accountant.
Common questions
What are the IRD depreciation rates for 2026?
There is no single rate. IRD publishes a separate diminishing value and straight line rate for every asset class, set out in IR265 and searchable through the online depreciation rate finder. The rate depends on both the asset and the industry it is used in.
Can I claim depreciation on an asset I am still paying off?
Yes, if it is on hire purchase or a finance lease. You are treated as the owner for tax from the start of the agreement and depreciate the full cash price, not the amount repaid so far. On an operating lease you claim the lease payments instead.
What is the difference between accounting depreciation and tax depreciation?
Accounting depreciation reflects how your business judges an asset’s useful life. Tax depreciation uses IRD’s published rate for that asset class. They often produce different numbers, and only the tax figure affects your tax bill.
Do I have to depreciate my business assets?
Generally yes. Depreciation is the default treatment for capital assets, and you need to notify Inland Revenue if you choose not to depreciate a particular asset.
What happens to depreciation when I sell the asset?
If you sell for more than its adjusted tax value, the excess is recovered as taxable income, up to the total depreciation you have claimed. If you sell for less, you can generally claim the shortfall as a loss on disposal.
Can I change from diminishing value to straight line?
Yes. You can use different methods for different assets and switch at the end of a year, calculating the new deduction from the asset’s adjusted tax value at that point.
Getting the finance structure right in the first place
Depreciation is worked out after the fact. The decision that actually moves the numbers is made earlier, when you choose how to fund the asset.
A hire purchase, a finance lease and an operating lease on the same $150,000 machine produce three different tax outcomes, three different effects on your balance sheet, and three different positions at the end of the term. We structure asset finance across trucks, plant, machinery and commercial vehicles, and the tax treatment is part of that conversation rather than an afterthought.
If you are weighing up a purchase, have a look at our equipment finance options or get in touch and we will talk through what each structure would mean for your business.
A note on advice. GVK Finance are finance brokers, not accountants or tax agents. This article explains how the rules work in general terms. It is not tax advice and your own position may differ. Confirm the treatment of any specific asset with your accountant before you file.
