The degressive depreciation is a term from tax law and every entrepreneur should know the difference between degressive and linear depreciation in order to be able to optimally exploit his tax advantages and possibilities.
Depreciation can be considered if you are either doing business or owning a rented property. The acquisition costs form the basis for the respective depreciation rate .
The exact definition of “degressive depreciation”
This type of depreciation, like straight-line depreciation and amortization, also falls under the depreciation methods for scheduled depreciation of fixed assets within the meaning of Section 253 (3) sentences 1 and 2 of the German Commercial Code (HGB).
As already briefly mentioned, the depreciation amounts decrease over the period of use, which means that the first few years are more heavily burdened by the depreciation. This can be the case, for example, if a machine in production runs in multiple shifts in the first few years due to high demand and production and thus also the wear and tear of the machine decrease over the years.
If depreciation is carried out with a constant percentage, for example 30%, then this is also referred to as geometic-degressive depreciation – in contrast to arithmetic-degressive depreciation.
The declining balance depreciation is currently not permitted for tax purposes (not provided for in Section 7 of the Income Tax Act) and could also be used to a limited extent in the past, for example in the years 2009 to 2010 (2.5 times the straight-line depreciation rate and a maximum of 25% (Section 7 Para . 2 EStG).
What is depreciated using the degressive method?
Until the end of 2010 it was possible to depreciate capital goods using the degressive method. However, since January 1st, 2011 this method is no longer permitted!
The degressive depreciation method could be chosen for capital goods and was based on the acquisition costs in the first year of depreciation. Thereafter, the residual book value of the respective asset is decisive, which is the difference to the straight-line depreciation. With this method, there is always a residual book value at the end of use.
Why do you write off degressively?
Many companies used declining balance depreciation because the depreciation amounts decreased year after year, which is particularly relevant for the first few years of use.
In contrast to straight-line depreciation, in which the depreciation amounts remain the same over the entire period, with the degressive depreciation they decrease from year to year. The depreciation of the asset is therefore not so great, which is particularly advantageous for companies that operate with high-tech systems and machines. The depreciation is significantly higher with straight-line depreciation!
The declining balance method of depreciation can no longer be used, however. It is still questionable whether there will be another change in the law after the changes that have already been made.
The difference between straight-line and declining balance depreciation
In the case of straight-line depreciation, the acquisition costs are claimed in constant annual amounts in accordance with the useful life, and taxes can then be saved with the depreciation. The depreciation is a deduction from the wear and tear of assets and is also referred to as depreciation for short.
The situation is different with the declining balance depreciation. Here the annual amounts that are written off are not consistently high, but rather they decrease in time intervals.
The declining balance depreciation is used if higher amounts are to be applied in the first few years of the useful life. However, this is only worthwhile if a minimum useful life of five years is planned. For example, a machine that has been used for 10 years can be depreciated by up to 40% in the first few years.
The formula and the calculation of the declining balance depreciation
According to howsmb.com, the following formula can be used to calculate the respective depreciation amount for the degressive depreciation:
Depreciation amount = depreciation rate x book value of the previous year
At the beginning of the year (01/01/2010) a company purchases a machine worth 100,000 euros (net acquisition costs) and the useful life is five years. The machine is to be depreciated degressively with a depreciation rate of 30%.
The procedure here would never lead to a complete write-down to the value zero. For this reason, the procedure is as follows:
In the year in which the straight-line depreciation is higher than the declining balance, the straight-line depreciation is generally used and this is also permissible for tax purposes according to Section 7 (3) sentence 1 EStG. If this is the case for 2012, the declining balance depreciation would be 14,700 euros (30% of 49,000 euros), the straight-line depreciation is higher at 16,333 euros (49,000 euros / three years of remaining useful life) and the depreciation process is as follows dar:
The advantages of declining balance depreciation
The degressive depreciation has one advantage over the linear one: the tax aspect! This is in the foreground here, because with the declining balance depreciation, the depreciation amount is highest in the first year, since the percentage rate is always calculated from the residual value of the object.
What does that mean in plain language? Anyone who knows as an entrepreneur that he will achieve or can expect quite high profits in the following years has the opportunity to use the degressive depreciation to his advantage. The company can save quite a bit on taxes, especially due to the fact that the depreciation amount is particularly high in the beginning.
Another advantage is that the declining balance depreciation is not tied to a fixed term in contrast to the straight-line depreciation, which is prescribed a fixed period. This means that the entrepreneur is bound to this time and cannot vary his depreciation amounts.