How does depreciation for wear and tear (AfA) work in the depreciation of assets?
August 14, 2023 | 50,00 EUR | answered by Dietrich Hohenadel
Dear tax consultant,
my name is Norbert Klein and I have a question regarding depreciation (AfA) when writing off assets. I am a self-employed entrepreneur and regularly invest in new machinery and equipment for my business. So far, I have always carried out the depreciation of assets using the straight-line method, but now I have heard that there is also the option of using the declining balance method.
My concerns are that I do not fully understand how AfA works and what advantages declining balance depreciation offers compared to straight-line depreciation. I am wondering if it could be beneficial for my company to switch to declining balance depreciation and how I would go about doing that.
Could you please explain to me how depreciation works and what the differences are between straight-line and declining balance depreciation? What requirements must be met in order to use declining balance depreciation and what impact would this have on my tax burden?
Thank you in advance for your help and advice.
Kind regards,
Norbert Klein
Dear Mr. Klein,
Thank you for your question regarding the depreciation of assets, especially concerning the topic of depreciation (AfA) and the differences between straight-line and declining balance depreciation. I will try to explain this topic to you as comprehensively as possible.
Depreciation (AfA) is a tax-recognized method to claim the loss in value of assets over their useful life for tax purposes. There are two common methods: straight-line and declining balance depreciation.
With straight-line depreciation, the loss in value of an asset is evenly spread out over the entire useful life. This means that the same amount is claimed as depreciation each year. The calculation is done according to the following formula: purchase cost of the asset divided by the useful life.
On the other hand, declining balance depreciation allows for a quicker depreciation in the initial years of use. Each year, a percentage of the remaining value of the asset is depreciated. The calculation is done according to the following formula: remaining value of the asset at the beginning of the year multiplied by a fixed percentage.
The advantage of declining balance depreciation is that higher depreciation amounts can be claimed in the early years of use, leading to a quicker tax relief. This can be particularly beneficial in the initial years after an investment to preserve the company's liquidity.
To use declining balance depreciation, certain conditions must be met. The asset must have a minimum useful life of 2 years for business purposes. Additionally, the useful life of the asset must be known, and declining balance depreciation must be applied in the first year of use.
Switching from straight-line to declining balance depreciation is possible, but it should be carefully considered. It is advisable to conduct a detailed calculation of the tax implications beforehand to determine if the switch is worthwhile. In some cases, it may be useful to combine both depreciation methods and choose the appropriate method based on the asset and its useful life.
I hope this explanation has been helpful to you. If you have any further questions or require personalized advice, please feel free to contact me.
Best regards,
Dietrich Hohenadel
Tax Advisor
