How to claim depreciation and full deductions for low-value assets ā€“ self-employed operators of trade or business

Deductions are offered for the money spent on purchases of goods that are necessary for you to operate your business (or to work in your trade). This spending is called purchases of “fixed assets”. Fixed assets are property dedicated to business use. Examples include buildings, machinery and equipment that are intended for the permanent, ongoing operation of the trade or business.

Fixed assets are either deductible in the form of annual depreciation, or in some cases deductible at once.

How to deduct the entire cost at once

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 max. 3 years. In this case, the price you can deduct has no maximum limit; or
  • if the asset falls into the category of “low-value assets”.

A "low-value asset" would typically be a telephone, tool or another small single item that you can book among the fixed assets of your business, and you paid max. €1200 for it (the 2021 and 2022 tax years). 

The maximum tax-deductible cost relating to purchases of low-value assets is €3,600 per year (2021 and 2022). 

Example: You have purchased a mobile phone for €295, a computer for €795, and a cash register for €500. Under the tax-deduction rules on fixed assets of low value, you can deduct €295 + €795 + €500 = €1,590 this year.

Depreciation = spreading the cost across several years

Tax 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, or if
  • purchase price is higher than €1,200 (in 2021 and 2022). 

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.

Amount depreciated – machinery and equipment

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 tax accounting reduce the total value of your assets and property: the depreciation expenses diminish the remaining value of the assets. 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 not based on the price that you had paid for the asset anymore.

If after the previous year’s depreciation, the asset’s residual acquisition cost is only €1,200 or less, you can deduct the entire amount.

However, if you buy some new assets for business purposes again, you must add their prices to the residual cost from previous years. After that, apply the 25-percent rate to the sum total.

Accelerated depreciation during the 2020–2023 taxable years is available at the rate of 50%. This rule is applied on purchases of new machinery and equipment.

The machine or piece of equipment has to have been entered into service on 1 January 2020 or later. If you use machines in your business or trade that are both new and old, you have to differentiate clearly the new machines for which accelerated depreciation is allowed. Your bookkeeping must contain separate entries for them.

Example: Pekka runs a pizza restaurant as a self-employed owner. In 2016, he invested €30,000 in restaurant furniture, fittings and equipment. They are Pekka’s business's fixed assets. His business bookkeeping has treated the 30,000-euro cost as an expense depreciable in the course of several years. Every tax year, Pekka books a depreciation expense for them, getting a tax-deduction. Up to 25% of residual cost can be depreciated every year. Because of the restaurant’s growth, Pekka buys a new, additional oven. The acquisition cost is €5,700. If Pekka were to buy yet another oven during 2020, he’d have the right to accelerate the depreciation, getting a higher deduction of 50% of the oven’s price.
Pekka makes the following entries:

Tax year Undepreciated balance at the end of the tax year, € Depreciation for the tax year, € Remaining cost value (=residual acquisition cost) at the end of the tax year, €

2016

Total price paid €30,000 

€7 500

€22 500

2017

€22 500

€5 625

€16 875

the oven purchased in 2018 (€5,700 is added to fixed assets’ resid. acq. cost)

€16 875 +

€5 700

= 22 575

€5 643,75

€16 931,25

2019 €16 931,25 €4 232,81 €12 698,44

Example: How to subtract the book value of a fixed asset you give away as a trade-in. In 2019, Pekka replaces the restaurant’s pizza delivery van. The new motor vehicle costs €10,000 minus the trade-in value of Pekka’s old van, €2,000. Pekka’s books indicate that at the end of the previous tax year, the restaurant’s fixed assets’ remaining undepreciated acquisition cost (resid. acquisition cost) stands at €16,931.25.

From this, it follows that also the undepreciated acquisition cost at the start of the 2019 tax year is €16 931,25
Enter the new vehicle’s acquisition cost, € + 10 000,00
Enter the subtracted trade-in value of the old vehicle -2000,00

The restaurant’s fixed assets’ acquisition cost at tax year’s end, before depreciation

= 24 931,25

Enter depreciation 25%

6 232,81

(25% of €24,931.25)

Remaining acquisition cost at the end of tax year 2019

18 698,44