Purchase prices of assets, deducted fully or through depreciation – limited liability companies, cooperative societies
Limited-liability companies and cooperative societies are able to deduct the prices of the items they buy for purposes that serve their business. The amounts spent are deducted, both in bookkeeping and in tax accounting. If the company or cooperative buys something that will serve its business operation for a long term, such a purchase is treated as part of its “fixed assets”. Examples of fixed assets include buildings, computer software, machinery and equipment.
In some cases, the entire purchase price of a fixed asset can be deducted in one single tax year. Alternatively, the price is divided into smaller parts that get deducted one-by-one during several tax years in the form of depreciation expenses.
How to deduct the entire cost
After you have bought a fixed asset, you are allowed to treat its price as a single tax-deductible expense if:
- The asset’s useful life is no more than 3 years. No maximum limit is in effect for the deductibility if useful life is shorter than 3 years.
- The asset falls into the category of “low-value assets”.
This means that you have purchased a telephone, a tool or another small single item that your company will book among its fixed assets and your company paid max. €850 for it (in 2020). The maximum limit is €1,200 in 2021.
The maximum total of the above deductions, relating to purchases of low-value assets, is €2,500 per year (in 2020). The maximum total is €3,600 for 2021.
Example: Your company spent €295.00 to buy a smartphone, bought a computer for €795.00 and then bought a cash register for €500.00. Under the deduction rules on fixed assets of low value, your company can deduct €295 + €795 + €500 = €1,590 this year.
Depreciation, i.e. spreading the cost over several years
The tax-deduction rules require that the price you paid for a fixed asset can only be deducted in the form of depreciation expenses if:
- Useful life is longer than 3 years.
- Purchase price is higher than €850 (in 2020). The limit is €1,200 in 2021.
For purposes of your company’s books, the depreciation concept means that you divide the expense into smaller parts: the paid purchase price is represented by the depreciation expenses that your company deducts during the years of the asset’s useful life in business use. For purposes of taxation, the standard way to allow deductions (of machinery and equipment, for example) is based on the maximum percentages of annual depreciation under the Act on the taxation of business income (Laki elinkeinotulon verottamisesta 360/1968, EVL).
No tax-deductible depreciation expensing is possible for fixed assets that are permanent. This means land, shares, securities (including housing-company shares and corporate stocks), etc., as they are assets not exposed to wear and tear.
Often, the Act on business tax allows a higher depreciation than the one entered in your company’s books. However, the company (cooperative) can still take advantage of the maximum rule, i.e. enjoy its right to deduct the maximum amounts. This requires that you not only maintain the company’s book-depreciation expenses but also have a “depreciation difference” account in the bookkeeping system. This way, when your company makes an entry that increases the “depreciation difference”, it is an expense from the perspective of bookkeeping and of the P/L, the profit-and-loss account of the company. With your company’s depreciation expensing according to a plan, together with the added tax-deductible expense consisting of the “depreciation difference”, your company can have the tax benefit relating to its assets’ maximum depreciation as the act on the taxation of business income allows.
Amount of depreciation
Under the tax rules in effect, 25% per year of the value of machinery, equipment and similar fixed assets is the maximum depreciation expense. For other categories of assets and the permissible rates of depreciation, see the instructions for Form 62.
The entries in your company’s tax accounting reduce the total value of your assets and property: the depreciation expenses diminish the remaining purchase price. Another commonly used name for the assets’ remaining value is “residual acquisition cost”. Next year, the calculation will be based on a percentage of the following year’s residual acquisition cost when you calculate your company’s depreciation in tax-accounting. In other words, the calculation is no longer based on the price that your company had paid.
However, if your company again buys some new assets for business purposes, you should add their prices to the residual cost from previous years. After that, apply the 25-percent rate to the sum total.
Example: A company has a machine, for which the residual acquisition cost (for tax purposes) at end of the 2020 tax year stands at €6,000. The machine’s residual acquisition cost is €6,000 also when tax year 2021 begins. During tax year 2021, the company buys more machines, paying €4,000 for them.
As a result, when the company calculates its tax-deductible depreciation expense for 2021, the base will be €10,000.
Under the tax rules in effect for 2020 to 2023, companies and cooperatives can increase the size of their deductible depreciation if new machines and equipment have been purchased.
Max. 50% of the price is allowed if all of the requirements below are fulfilled:
- The machine/equipment is in service in the business – or at the agricultural farm – of which the taxpayer company is the operator of.
- The machine/equipment is booked as part of moveable fixed assets of the business – or booked as part of agricultural fixed assets.
- The machine/equipment is new, not a second-hand purchase.
- The machine/equipment was entered into service on 1 January 2020 or later.
If your company also chooses to book the depreciation expense against its economic result for the year, the depreciation must also be entered in to the company’s bookkeeping and P/L, not only in its tax accounting.
You can log in to MyTax to report the accelerated tax-deductible depreciation, i.e. fill in the Specification tax relief depreciation field corresponding to Form 62.
Depreciation not deducted in the company’s tax accounting (unused depreciation)
If the company’s books contain a higher expense than what is allowed under the act on the taxation of business income as the maximum depreciation rate, the result is that a “depreciation difference” is left unused. If the books show a high depreciation expense — the maximum expense allowed by the act on business tax is lower that the booked expense — this causes a negative difference, i.e. a certain amount that cannot be deducted as an expense in taxation. The difference amount is left unused, put on a shelf.
To provide information on your unused depreciation, complete and submit Form 12A Specification of unused tax depreciation. The company can reverse the “shelved” expense entry on its tax returns during the upcoming years, if depreciation in book accounts gives rise to a lower deductible expense (during an upcoming year) than the maximum depreciation allowed by the act on the taxation of business income. For the tax years when difference amounts are formed (you put unused depreciation on the shelf), submit Form 12A to give details. Correspondingly, for any tax year when additional deductions are claimed (you take unused expenses away from the shelf to claim a deduction), submit Form 12A to give details on that, too.