Vehicle depreciation and profit reduction
January 5, 2010 | 25,00 EUR | answered by Dipl.BW/SB Ulrich Stiller
Dear Sir or Madam,
I have a basic question regarding the topic of profit reduction and vehicle depreciation.
Scenario: Vehicle purchase 80,000 euros (truck)
Depreciation according to table 6 years linear
As I understand it, annual depreciation is a way to offset the loss in value due to use, in a tax-efficient (profit-reducing) manner. In this case, the value of the truck in the balance sheet is reduced by 1/6 per year. However, this is only meant to represent the loss in value.
The vehicle is financed over 5 years, so the annual burden of the installments is higher than the depreciation amount. Since I cannot change the depreciation, in principle, I am worse off in the first five years of use compared to if I were to record the monthly installments as "ordinary operating expenses". This doesn't seem to make sense. It's essentially no different than if I were to deduct the 80,000 euros in profit immediately, just spread out over 6 years. In the end, depreciation is not a tax relief, but rather a hindrance. If I could carry forward the 80,000 euros as a loss carryforward, I would have much more financial flexibility for investments in the first few years than with the 6-year distribution. Am I making a mistake in my thinking?
Best regards,
U. Ponten
Dear inquirer,
Thank you for your inquiry, which I would like to answer based on your information and in light of your commitment as follows:
In tax law, the depreciation of business or investment assets is called depreciation or AfA. The AfA amounts represent deductible operating expenses. These lead to a reduction in profit. If you write off linearly with 13,333 euros over 6 years and your personal tax rate is 30%, then your annual income tax savings are approximately 4,000 euros, which amounts to 24,000 euros in income tax savings over 6 years. In addition, you can also deduct the interest on the financing of the truck as a business expense for tax purposes. Taking the mentioned tax rate of 30%, you also have an income tax savings of 30% through the interest.
A 100% full depreciation is unfortunately not possible, as there is no low-value asset. That's the unfortunate legal situation.
You also have the option to use the declining AfA. With effect from 1.1.2009, the declining AfA was reintroduced for assets purchased or manufactured in the period from 2009 to 2010. For assets purchased or manufactured after 31.12.2008 and before 1.1.2011, the declining AfA may not exceed 2½ times the linear AfA rate and a maximum of 25% (§ 7 para. 2 EStG n.F.). This means that in your case, in 2009 and 2010, you can deduct 25% of the acquisition cost (in 2009) and 25% of the remaining book value (in 2010) for tax purposes. From 2011, you then write off linearly with 25% of the remaining book value.
As you can see, there are indeed options for structuring. Therefore, for your own benefit, you should contact a tax advisor.
Best regards,
Ulrich Stiller
Tax advisor
