Depreciation expenses – limited liability companies, cooperative societies
Deductions are offered for the money spent on purchases of goods that are necessary for a limited liability company or cooperative society to operate its business. These goods fall under the category of “fixed assets”. Fixed assets such as buildings, machinery and equipment are intended for the permanent, ongoing operation of the business.
Fixed assets are either deductible in the form of annual depreciation or in some cases, their entire cost can be deductible at once.
Please note that under the rules on accelerated depreciation for the years 2020–2023, limited liability companies and cooperatives are able to increase the size of their deductible depreciation if new machines and equipment has been purchased.
How to deduct the entire cost
If either one of the following two conditions applies, you can deduct the entire purchase price of a new fixed asset:
- Its useful life is likely to be shorter than 3 years. No maximum limit is in effect for the deductibility if useful life is shorter than 3 years.
- It is a low-value asset. 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 (this limit is raised to €1,200 for the 2021 tax year). The sum total of the above deductions, relating to purchases of low-value assets, is €2,500 per year (raised to €3,600 for tax year 2021).
Illustration: 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 tax rules on fixed assets of low value, your company can deduct €295 + €795 + €500 = €1,590 in total.
Periodisation of the cost over several years, i.e. depreciation of the value
From the above, it follows that if the asset’s useful life is longer than 3 years and if your company paid more than €850 for it (or more than €1,200 in 2021), no one-off deduction is allowed. Instead, you must make depreciation entries in your tax accounting, which will be deducted as annual expenses that will spread the paid cost over the upcoming years. The depreciation concept means that you divide the cost. Part of the cost is represented by the depreciation expenses that your company will claim during the years when the asset is in operation.
However, depreciation expenses cannot be deducted from the purchase price of assets deemed to be permanent, not subject to wear and tear. Fixed assets of more permanent nature include land, shares, securities (including housing-company shares, and also including corporate stocks).
Amount depreciated – machinery and equipment
Under the tax rules in effect, 25% per year of the value of machinery, equipment and similar fixed assets can be treated as a tax-deductible 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 value from previous years. Another commonly used name for the assets’ remaining value is “residual acquisition cost”. Next year, the tax-accounting calculation to arrive at your company’s depreciation expense will be based on a percentage of next year’s residual acquisition cost. In other words, the calculation will not be based on the amount of money that your company had paid for the assets.
However, if your company buys more assets to utilise them for business purposes, you should add that cost to the cost from previous years. Now you can apply the 25-percent rate to the sum total. This is your max. permitted depreciation expense for the year.
Under the tax rules in effect for 2020 to 2023, limited liability companies and cooperatives can increase the size of their deductible depreciation if new machines and equipment have been purchased, provided that the company or cooperative operates business or agriculture. Max. 50% depreciation is allowed if all the requirements are fulfilled as follows (50% of the acquisition cost):
The machine or piece of equipment:
- Must be in service where the taxpayer entity operates its business or agriculture; in the business or at the agricultural farm.
- Must be booked as part of moveable fixed assets of the business – or booked as part of agricultural fixed assets.
- Must be new, i.e. no second-hand purchases.
- Must be entered into service on 1 January 2020 or later.
Your company can submit an application for accelerated depreciation in MyTax. If your company also chooses to book the depreciation expense against its economic result for the year, the depreciation must also be booked as a P/L expense, not only as a tax-accounting entry. Accelerated depreciation is available to all sectors of business.