How to depreciate fixed assets?
Fixed assets are usually the most expensive part of a business. However, it comes with a complex depreciation obligation. We'll advise you on how to calculate depreciation so it doesn't make your head spin.
What is depreciation?
Depreciation is an accounting measure of the wear and tear on tangible and intangible fixed assets. Unlike current assets, we do not consume them all at once. On the contrary, they usually serve us for several years - but as time passes, their value gradually decreases, which must also be reflected in the accounts.
The sum of depreciation over the years (i.e. the total value of wear and tear for the period) is known as depreciation. The difference between the entry price and the depreciation is then the residual value of the asset.
Depreciation is divided into two types: accounting and tax. They differ in the method of calculation, as well as in their application and statutory treatment.
Accounting depreciation is governed by the Accounting Act. They reflect the expected decline in the value of a company's assets and thus help to give a true picture of their current condition. In addition, depreciation serves to gradually 'dissolve' the cost of the asset into the cost of goods sold (which is used in so-called management accounting).
Accounting depreciation is an accounting expense (account group 55), while depreciation (account group 08) appears in the accounts as an adjustment to assets (assets with a negative value) because it reduces the value of the relevant asset.
You determine the allocation of accounting depreciation on the basis of a depreciation schedule. The specific method of calculation is not binding - but in practice depreciation is usually calculated as:
They express wear and tear over a specific period (typically a year). They can be calculated in several ways:
- The simplest option is straight-line depreciation - simply divide the input price of the asset by its useful life and you get the amount of annual depreciation.
- In the accelerated variant, the amount of depreciation varies, usually decreasing as the years go by.
In this case, wear and tear is calculated based on the chosen units of performance (typically the number of miles driven on the vehicle).
Note: If you only keep tax records, you do not deal with accounting depreciation at all.
Tax depreciation represents the portion of the value of fixed assets that you can deduct as an expense in a given tax year. Unlike accounting depreciation , it may not reflect the actual wear and tear of the asset.
Tax depreciation amounts are often different from accounting depreciation amounts (you also report this difference on your tax return).
Tax depreciation is NOT accounted for. Their annual amount appears only in the tax return. Unlike accounting depreciation, you can break tax depreciation simply by not claiming tax depreciation in a given year, which automatically extends the depreciation period by one year.
How does tax depreciation work?
In the first year of depreciation, you will find out which of the depreciation groups according to §30 of the Income Tax Act the asset belongs to. The table in Annex 1 to the ITA will help you to make the correct classification.
You will then choose the depreciation method you will use throughout the depreciation period (you cannot change the method during the depreciation period).
You have a choice of 2 depreciation methods:
- Straight-line depreciation means that you deduct the same amount of the value of the asset from your taxes each year until it is fully depreciated. The exception is the first year of depreciation, when a smaller amount is always deducted.
- Accelerated depreciation reflects the fact that property is generally used most in the first years of use. The highest tax depreciation is in the second year of depreciation, and the annual depreciation amount gradually decreases in subsequent years.
The amount of accelerated depreciation in the first year of depreciation is calculated as the input cost divided by the accelerated depreciation factor. In subsequent years, the amount of accelerated depreciation is determined according to the following formula:
2 × depreciation cost / (coefficient for subsequent years - number of years you have already depreciated the asset)
The law sets a minimum depreciation period and a maximum depreciation rate. This means that if necessary, you can depreciate the asset for longer using a lower rate.
The choice of method depends on your preferences and situation. Real estate is usually depreciated on a straight-line basis, while movable property is depreciated on an accelerated basis - but this is not a requirement.
Caution! Remember that the input cost of the property on which you calculate depreciation must be properly supported and documented. Otherwise, you may run the risk of running afoul of the tax authorities.
This issue was recently addressed by the Regional Court in Hradec Králové. In its judgment, the court dealt with a case of a company that claimed depreciation of assets without satisfactory evidence of their cost. There were discrepancies in the accounting that the tax office did not like. Therefore, it did not recognise the depreciation and assessed tax on the company - and the court upheld the authority's position on appeal.
What happens after the asset is written off?
Once a fixed asset is fully written off, you have 2 options. Either you keep the asset (and continue to use it as you see fit) or you remove it from the books.
Disposal of assets
Disposal of fixed assets can occur after the asset has been written off, but also during the depreciation process (e.g. due to sale or damage).
The specific accounting treatment depends on what happens next to the asset. Most often, it is sold, physically disposed of, donated or transferred to personal ownership.
Disposal usually takes place in two steps:
- First, the asset is derecognised at cost (charged to the property and depreciation account).
- Then you account for the residual value in the cost account (depending on the method of disposal) and the depreciation account.
Attention! If you dispose of an asset before the end of the tax year, you can only claim half of the relevant tax depreciation for that year.
Depreciation is a piece of cake...,
...as long as you get it done by a professional. Put your accounting and taxes in the hands of professionals. Contact us using the form - and we'll handle the tedious paperwork for you.