When you have made an investment, you have to write off that amount.
If you are still in doubt when we talk about ‘depreciation’ or when something is an investment (which you then depreciate), be sure to read our blog article on depreciation and how to do it.
In a nutshell, ‘depreciate’ means that means that the cost is not immediately deducted from your current profit, but that you are going to spread it over time (the depreciation period).
Now, with sole proprietors, you have a nice extra option there. You can choose the date from which you start the depreciation (always in the same year of purchase).
An example to clarify the start date of your depreciation:
You bought a new desk on 1 December 2023 for 2,500 euros.
If you are exempted from VAT, you may calculate for a moment that this 2,500 euros includes VAT. Since you cannot recover VAT via this vAT type, you can add the non-recoverable VAT to your purchase cost and write it off.
If you are a VAT subject to VAT, you can calculate that this is EUR 2,500 excluding VAT. You will recover the VAT on this purchase and the purchase cost excluding VAT forms the basis for your depreciations.
Specifically in a sole proprietors’ business, you may therefore choose to depreciate this investment, for example, from 1 January 2023. So even though you purchased on 1 December 2023, you may just as well set the start date of your depreciation to 1 January 2023. That may be more interesting from an accounting perspective!
What is the consequence for my accounting if I …
… start depreciation from 1 January 2023 and decide that I will depreciate my investment over 10 years?
Then a full year of depreciation will count for the first year, i.e. 2,500 euros (purchase value) divided by 10 years = 250 euros which will be deducted as an expense from my profit (and on which I will therefore not be taxed). This applies for the next 10 years.
… depreciation starts from 1 December 2023 decide that I will depreciate my investment over 10 years?
Then a small amount of depreciation will count for the first year, namely only for the month of December.
2,500 euros (purchase value) divided by 10 years = 250 euros per year.
However, for this year (2023), I may only depreciate for one month. There will therefore be
only 20.83 euros (= 250 euros / 12 months) in my accounts.
Of course, my depreciation still runs for the full 10 years, that fact is the same. As a result, at the end there will also be depreciation until 1 December 2033 (compared to 1 January 2033).
What is the advantage of starting depreciation sooner?
Ultimately, the full purchase value enters your accounts via depreciations, so there is absolutely no difference in that!
However, if you notice towards the end of the year that you have made a lot of profit, it may be interesting to do another investment.
By allowing the depreciation to start on 1 January, you will be able to include a larger amount in your costs for this year, leaving you with less profit (and therefore less taxes to pay on your high profit).
And can everyone just choose?
Sole proprietors do! Companies cannot! A company is required to start depreciating from the purchase date, always. In technical jargon this is sometimes called ‘pro rata depreciation’, which simply means that in a company you are required to start depreciating from the purchase date of your investment.
Tip:
By the way, there are a lot of different ways to depreciate, think linear depreciation, declining balance depreciation, depreciation with a residual value. View it in our article on how to depreciate an investment using a numerical example!
Most importantly, you need to know that within a sole proprietor, there is the option to choose from which date you start depreciating. Other than that, you may rely on Dexxter and our handy flow to enter an investment and its depreciations.
