In this article, we cover everything you need to know about depreciation in a sole proprietor.
Which purchases are investments? 🔎
Say you buy a laptop for €1500 and you think you will use it for 3 years.
You will have to pay for the laptop immediately. Your expenses will then be €1500. But the cost is only €500 per year. So every year you will be able to write off €500. In short, the government wants you to write off investments.
What exactly is an investment? A more expensive purchase that lasts longer than one year. There is no set minimum amount to speak of a ‘more expensive’ purchase, but generally you can take €250 or more.
Would you like some examples of investments?
- Office costs: Office furniture is considered a 10-year investment
- Transport costs: Purchasing a car, bike or electric scooter should be depreciated.
- Technology and equipment: Computers, phone numbers, and machinery must be depreciated
So investments in a sole proprietor can be anything from buying new equipment to investing in business assets such as a car or premises.
Tip from an accountant
Sometimes sole proprietors select a threshold of €250 per item to consider something an investment.
Over how many years should I spread the cost?
You can choose some of this yourself, but know that the taxman provides guidelines. To decide over how many years you will depreciate a purchase, you will need to reason about its lifespan. For example, a machine will probably last 10 years, but a mobile phone might only last 3 years.
What does depreciation mean for your accounting?
The more expenses you have, the lower your taxable income is and the less taxes you have to pay. So it is useful to be able to bring in costs!
With investments, you have to spread the cost over several years, so a certain amount of costs will be added each year. So the tax benefit remains the same. Still, sometimes it can be handy to enter a purchase as a cost in one go.
This could be the case, for example, if you change statutes or would exceed a limit amount.
Tip:
When you enter in Dexxter that a purchase is an investment, it is automatically debited, convenient and easy!
What do I do about vAT?
I am subject to VAT
If you are subject to VAT, you can of course recover the paid VAT via your vAT declaration. In the example, you had bought a laptop for EUR 1,500 excluding VAT, on which you therefore paid an extra 21% VAT in the shop, i.e. EUR 315.
Of course, you should not include the paid VAT in the depreciations, because you will recover that part of paid VAT via your next vAT declaration. Including it both in the depreciations and recovering it via your next vAT declaration would then have a double impact, which of course is not allowed.
I am not subject to VAT or exempt from VAT
If you are not subject to VAT, you will not be able to recover the piece of extra paid VAT via a vAT declaration. In such a case, the vAT paid is indeed part of the cost.
In our example, suppose you are a non-VAT subject to VAT, you can write off €1,500 excluding VAT + €315 paid VAT. So that makes your new laptop worth €1,815 as an investment in your accounts, which you will then depreciate over the next 3 years.
Depreciation or one-off deduction: which is more advantageous?
As indicated earlier, the tax advantage is the same. Still, many entrepreneurs prefer to depreciate quickly. The faster you write off, the faster you can take advantage of the tax benefit.
If you have a year in which you earn an exceptional amount, the extra part might start being taxed in the next tax bracket. In that year, it would then be convenient to incur some extra expenses and not have to depreciate.
Different ways of depreciation
There are different methods of applying depreciations in a sole proprietor’s business. The most common are:
- Linear depreciation: This method depreciates the cost of an investment evenly over its useful life.
- Degressive depreciation: This involves writing off a higher percentage of the cost in the first few years of an enabled asset’s life, which helps to absorb depreciation quickly.
- Progressive depreciation: With this method, you depreciate more each year. So you write off less in the first years than in the later years.
With sole proprietors, you have an additional advantage: in the year of purchases, you can choose when to start depreciating.
How do you calculate yearly depreciation?
Most companies depreciate on a straight-line basis, which means they will depreciate the same amount yearly.
The formula to calculate yearly depreciation is as follows: business percentage * purchase amount / lifetime. If you do your accounting in Excel, you will have to add this amount to your costs every year. If you do your accounting in Dexxter, this is done automatically.
Did you know?
Don’t worry, Dexxter automatically calculates depreciation for you!
What if my purchase is fully amortised?
Just keep using🙏
Sure! Just because a purchase has been written off doesn’t mean you can’t use it anymore. Who knows, maybe your mobile phone can last another 2 years or your desk is not broken at all. You won’t be able to add any more expenses to your accounts, though.
Selling 💶
This is allowed! However, you will have to add the sales price to your income. You can do this via daily receipts or by making an invoice.
Giving away to a family member or friend 🫂
Giving away a purchase is actually not allowed. But. you can ‘sell it to yourself’ for its market value. You can find this market value by researching prices on second-hand sites.
The extra income for your sole proprietors can be added to your accounts by means of invoices or daily receipts.
Once you have bought it from yourself, you may of course give it away.
Donating to good causes🤲
Donating goods to a good cause goes against the principle that a profitable activity should pursue. So the same principle applies here that you must first buy it from yourself to be allowed to give it away.
Discarding 🚮
If the stuff is effectively no longer usable and consequently ready for the bin. Then of course you are allowed to do this and in such a case you do not have to record any additional income in your file. A sale to yourself is not necessary in this case, as the market value is €0 anyway.
