What is depreciation?
Depreciation – also known as AfA (deduction for wear and tear) – refers to the process of spreading the cost of an asset over its useful life. Instead of deducting the entire purchase price as a business expense in the year of acquisition, the amount is gradually claimed for tax purposes over several years. This reflects the actual loss in value that, for example, a laptop, vehicle, or machine experiences over time.
When and what can be depreciated?
Self-employed individuals may depreciate all depreciable, long-term assets they purchase for their business. These include, for example:
- Computers, tablets, or office furniture
- Company vehicles or tools
- Machines, cameras, or other work equipment
Requirement: The asset must be used in the business for more than one year and cost more than €952 net (€1,134.28 gross) – the current limit for so-called low-value assets (GWG). If the price is below this, the expense can be deducted in full immediately.
How does depreciation work?
Depreciation helps smooth out and make high acquisition costs more predictable for tax purposes. Instead of lowering the tax burden in one year and raising it again in subsequent years, it distributes the expense evenly. It also enables smart investment planning, as larger purchases can be strategically placed in tax-advantageous years.
Depreciation is carried out in several steps and uses different methods depending on the type of investment, with straight-line depreciation and special rules such as immediate and pool depreciation being particularly relevant for the self-employed. First, it is checked whether it is indeed a depreciable asset used over several years, such as a laptop, vehicle, camera, or office furniture that serves the business and is intended to be used for more than one year. Then the net acquisition costs are determined, i.e., the purchase price excluding VAT, and the official depreciation table is consulted to see what standard useful life is provided for this asset, for example several years for computers, vehicles, or furniture. Based on this useful life, the annual depreciation amount is calculated and recorded as a business expense in the bookkeeping each year, thereby reducing taxable profit.
Why is it worthwhile?
The most common method is straight-line depreciation. Here, the same proportion of the acquisition value is deducted each year. Example: A laptop costs €2,000 net and may be depreciated over 3 years according to the depreciation table. Thus, €666.67 (2,000 / 3) can be claimed annually as a business expense. In some cases – such as with significant value loss at the beginning – declining balance depreciation may also be sensible. This allows higher depreciation amounts in the early years, which then decrease annually. However, it is only temporarily permitted by law and depends on current tax regulations.
A key advantage lies in tax savings. The annual depreciation amounts reduce taxable profit, which in turn lowers income or trade tax payable. For example, if you purchase work equipment for €3,000 and depreciate it over three years, you can claim €1,000 as a business expense each year – saving a portion of your tax burden year after year.
Another important point is liquidity planning. Large investments often need to be financed from ongoing business operations. Depreciation prevents the entire cost of an asset from directly burdening the balance sheet and profit of one year heavily. Instead, it spreads the expense evenly over the useful life – this provides planning security and more stable income-expense ratios.
Conclusion
Self-employed individuals who keep track of their investments and know the rules of depreciation save real money. Clean bookkeeping and consulting the current depreciation table always pay off – or even better: consulting with a tax advisor to get the maximum out of depreciation.