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Understand and calculate your tax depreciation

Understand and calculate your tax depreciation

Welink Accountants

Welink Accountants



1. What are the different types of amortization?

  • a. Straight-line depreciation 
  • b. Declining balance depreciation
  • c. Variable amortization
  • d. Exceptional amortization

2. What is tax depreciation?

  • a. Software

3. How to calculate tax depreciation?

  • a. Straight-line depreciation calculation
  • b. Calculation of declining balance depreciation



What are the different types of amortization?


The choice of a depreciation method depends on the nature of an asset and its use. There are four types of depreciation that allow a percentage of the purchase price of an item of equipment to be deducted as an expense each year over its useful life.



Straight-line depreciation 


Straight-line depreciation offers a constant annuity over a given period. This system then allows the value of the asset to be reduced according to its initial value and the theoretical number of years it has been in use.



Straight-line depreciation represents the normal method of tax depreciation. It is mandatory for second-hand assets and for those with a useful life of less than 3 years. It is easy to implement and remains the best method to use. This type of depreciation comes into effect when declining balance depreciation is not possible.



Declining balance depreciation



Declining balance depreciation is a tax depreciation method that spreads the purchase cost of an asset over its useful life. It allows for a rapid depreciation of a fixed asset over the first few years. This type of depreciation can only be applied to the capital assets of an industrial, commercial, agricultural, craft or liberal enterprise. In this case, it excludes passenger vehicles, commercial equipment and escalators, etc.




Unlike straight-line depreciation, the annuities of this traditional method of depreciation are calculated on the basis of the depreciated value of an asset. The depreciation period must be greater than or equal to 3 years. Its main advantage is that it allows you to pay less taxes by reducing your taxable income.



Variable amortization


This type of depreciation is intended to calculate the loss in value of an asset based on the actual wear and tear of an asset. The calculation of annuities thus depends on the more or less intensive use of the equipment. The latter decrease as the economic benefits of the asset concerned melt away.


Variable depreciation or depreciation per unit of work applies only to fixed assets that allow for a forecast. It will only be possible to depreciate an asset if the total number of work units can be accurately estimated over the useful life of the asset.



Exceptional amortization


Exceptional depreciation or accelerated depreciation applies to specific assets, including farm equipment and new technologies. It makes it possible to quickly amortize significant costs, in order to protect a professional from any difficulties. This type of depreciation makes it possible to spread the value of a particular investment over a few months.


Only the tax authorities can grant this preferential treatment. The company must apply to the Departmental Public Finance Department before purchasing or completing the manufacture of the asset to benefit from accelerated depreciation.



What is tax depreciation?


Tax depreciation is a non-existent provision in accounting. Depending on the nature of the assets, the company will have to deduct the entire acquisition value of the equipment during a specific period of time.


Tax depreciation does not apply to all business investments. Here are the types of assets that can benefit from.





The cost of software required to operate eligible hardware in a business may be subject to tax depreciation. Its deduction can be amortized over one year. However, if it is acquired during the year, the deduction will be divided into two fiscal years prorata temporis.


For example, software that costs €1,200 is acquired in November 2019. The company will be able to deduct €200 in the same year (€1200 x 2 / 12 = €200) and invest the remaining €1,000 in 2020



How to calculate tax depreciation?


Each type of tax depreciation has its own precise calculation method.



Straight-line depreciation calculation


In order to calculate the straight-line depreciation of capital assets, the depreciation rate must first be calculated:


Straight-line depreciation rate = 1/actual useful life (in years)


Then, the rate obtained must be applied to the depreciable base of the fixed asset in order to deduct the depreciation annuity:


Depreciable basis = purchase price excl. VAT + delivery costs excl. VAT + commissioning costs




Depreciation annuity = depreciable base x straight-line depreciation rate.


For the first annuity: base x rate x (time/ 360)


  • Example


One company purchased industrial equipment for 20,000 euros on November 28, 20018. Straight-line depreciation will be spread over 5 years. Thus, the straight-line depreciation rate is 1/5, i.e. 20%.


As for the annuity, it will be 20,000 x (2 + 30)/ 360) x 20% for the first year, the next 4 annuities will be at 20% of the depreciable base and the remainder will be paid in the fifth year.


The amount of amortization is, therefore, €640 in 2018, €4,000 from 2019 - 2022, and €3,360 in 2023.



Calculation of declining balance depreciation


To calculate the declining balance depreciation of fixed assets, the declining balance depreciation rate is to be calculated upstream:


Declining balance rate = linear rate x declining balance coefficient.


The coefficient is:


  • 1.25 for a useful life of 2 to 4 years; 

  • 1.17 for 5 to 6 years;

  • 2.25 for a duration of more than 6 years.


The calculation of declining balance depreciation differs from the first year to the other years. For the first case, the depreciation is:


Declining balance = base x rate x (time/ 12)


The beginning of the first annuity corresponds to the first day of the month of the acquisition of a piece of equipment.


For the other annuities, the higher of the two rates is applied: the linear rate and the decreasing rate. The basis for the calculation is the net book value (NBV) of the previous year.


VNC = (Original value [VO] - sum of depreciation since the beginning of the acquisition of the property.


  • Example:

A company bought a machine on July 5, 2015 for 10 000 € HT. Its lifespan is 5 years.


For the first year: base x rate x [time/ 12].

Rate = 100/5% x 1.17= 20% x 1.17 = 35%.

In 2015, the annuity is 10 000 x 35% x 6/12 = 1 750 €.

In 2016 : [10 000 – 1 750] x 35 % = 2 887,5 €

In 2017 : [8 250 – 2 887,5] x 35 % = 1 876,88 €



                                              Understand and calculate your tax depreciation

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