What impact does depreciation have on my operating result?
October 3, 2023 | 50,00 EUR | answered by Alice Heck
Dear tax advisor,
My name is Tobias König and I run a small business in the service industry. In reviewing my accounting, I have noticed that depreciation has a significant impact on my operating profit. I am wondering about the effects of depreciation on my operating profit and if there are possible solutions to positively influence it.
Regarding the current situation: In my annual financial statements, I see that the depreciation on my fixed assets is significantly affecting my operating profit negatively. These depreciations reduce my profit and therefore also have implications for my tax burden. I am concerned that this could lead to financial constraints in the long term and would like to understand how I can improve this situation.
I am wondering if there are ways to optimize or reduce depreciation to improve my operating profit. Are there alternative depreciation methods that are better suited for my company? Or are there other measures I can take to increase my operating profit while meeting my tax obligations?
I hope you can assist me with this question and provide possible solutions. Thank you in advance for your support and advice.
Sincerely,
Tobias König
Dear Mr. King,
Thank you for your inquiry regarding depreciation in your company and its impact on your operating result. Depreciation is an important part of accounting and indeed has a significant influence on a company's operating result.
Depreciation is used to record the decrease in value of fixed assets over their useful life. Depreciation reduces the company's profit because the acquisition costs of the fixed assets are spread out over the years. This in turn affects the company's tax burden, as the profit used to calculate taxes is reduced by depreciation.
There are various ways to optimize or reduce depreciation to improve your operating result. One possibility, for example, would be to use alternative depreciation methods. In addition to straight-line depreciation, where the depreciation amounts are constant each year, there is also declining balance depreciation, where higher depreciation amounts are set in the early years. This can result in a greater reduction in profit in the early years and thus a decrease in the tax burden.
Another option would be to review and possibly adjust the useful life of the fixed assets. If the useful life is extended, the depreciation amounts per year decrease, which can lead to a lower burden on the operating result.
Furthermore, you may consider making targeted investments to increase the depreciation amounts. By investing in new fixed assets, you can increase the depreciation amounts and therefore reduce your profit. This can be particularly useful if you are already planning investments in your company.
In addition to these measures, you could also review and optimize your general business processes to increase your operating result. This could be achieved through cost savings, revenue increases, or the introduction of new products or services.
Finally, I recommend that you consult with an experienced tax advisor to work together on possible solutions and discuss your individual situation. A tax advisor can professionally assist you in optimizing your depreciation and improving your operating result.
I hope that my explanation has been helpful to you and has supported you in solving your question. If you have any further questions, do not hesitate to contact me.
Best regards,
Alice Heck
Tax advisor
