Depreciation refers to the allocation of the acquisition or production costs of a depreciable asset over its expected useful life. In accounting and tax law (tax depreciation, AfA) this records the loss in value of an asset as an expense in the appropriate periods and thus reduces taxable profit.
Fundamentals and legal framework
Depreciation is relevant both under commercial law (HGB) and tax law (in particular the Income Tax Act, EStG). Under commercial law it serves the conservative valuation of fixed assets; under tax law the rules for tax depreciation (AfA) govern the tax-allowed allocation of costs over the useful life.
Key points:
- Useful life: The ordinary useful life of an asset determines the amount of annual depreciation. Guidance is provided by the AfA table of the Federal Ministry of Finance (BMF).
- Scheduled and unscheduled depreciation: Scheduled depreciation is carried out according to a predetermined depreciation plan. Unscheduled (impairment) write-downs must be recognized under commercial law when there is a permanent diminution in value.
- Documentation: Invoice, acquisition date and AfA calculation must be stored in a traceable manner.
Types of depreciation and tax-specific considerations
For practice in small businesses and for freelancers the following forms are particularly relevant:
Straight-line depreciation
The most common method: acquisition or production costs are allocated evenly over the useful life. Formula: Annual AfA = acquisition cost / useful life.
Special cases
- Low-value assets (GWG): Assets up to a certain net value (current limit: up to 800 EUR net) may be expensed immediately. This simplifies bookkeeping and eases both liquidity and administrative burden.
- Unscheduled (impairment) write-downs: In the case of a permanent loss in value an unscheduled write-down must be made under commercial law (e.g. total loss). Tax law requires stricter conditions.
- Tax special depreciation: Under certain conditions additional deductions are possible (e.g. subsidies, investment incentives); these are subject to statutory requirements and should be reviewed with your tax advisor.
Practice: bookings, examples and calculation
Concrete journal entries and calculation examples help in day-to-day practice.
Example 1 – Computer purchase
A freelancer buys a computer for 1,200 EUR net. Typical useful life: 3 years. Annual AfA (straight-line): 1,200 / 3 = 400 EUR.
Booking on acquisition:
- Debit: Office and business equipment (BGA) 1,200 EUR
- Credit: Bank 1,200 EUR
Record annual depreciation:
- Debit: Depreciation on tangible fixed assets 400 EUR
- Credit: BGA 400 EUR
Example 2 – GWG
An office chair for 350 EUR net can be recorded immediately as a business expense (provided it is below the GWG threshold). Booking:
- Debit: Office supplies / BGA 350 EUR
- Credit: Bank 350 EUR
Special notes and practical recommendations
For freelancers and small businesses I recommend the following practical rules:
- Use the AfA table: To determine realistic useful lives and avoid estimation errors.
- Make use of GWG limits: Immediate deductions simplify bookkeeping and temporarily reduce tax burden.
- Separate commercial and tax balance sheets: Check for differences between HGB and EStG—different depreciation periods can lead to deferred taxes or permanent differences.
- Documentation and advice: Keep supporting documents and consult your tax advisor for complex cases, especially for investment allowance, special depreciation or unscheduled impairments.
In conclusion: depreciation is a central instrument for period-appropriate profit determination and tax planning. Clean documentation, knowledge of tax rules (EStG) and commercial requirements (HGB) protects against errors and opens planning opportunities for small businesses and freelancers.