Depreciation
The declining balance depreciation of assets acquired in 2009 and 2010 was again permitted in the context of Economic Package I.
Straight line depreciation
Using the straight line depreciation method, production cost (net) for the photovoltaic facility is shown in equal amounts in cash basis accounting. Straight line depreciation is to be recognised pro rata temporis for the year the photovoltaic facility is commissioned. The relevant month is calculated in full (for example, December 1/12 of the resulting straight line depreciation). The missing remaining months from the first year of depreciation are calculated in the 21st year. For example, in the 21st year (11/12) of the calculated straight line depreciation.
Declining balance depreciation
In contrast to the straight line depreciation, declining balance depreciation can be recognised in cash basis accounting. In declining balance depreciation, a maximum of 2.5 times the value of straight line depreciation can be depreciated per annum. For the photovoltaic industry, this translates to 2.5 x 5% (straight line) = 12.5%. The amount should always be deducted from the remaining net residual value. Declining balance depreciation may be below the factor of 2.5 of straight line depreciation. However it may not be lower than the straight line depreciation. After some years, the amount of declining balance depreciation falls below that of straight line depreciation which remains constant at 5%. As a rule, the change is made from declining balance to straight line depreciation. This method is then used until the end of the period of depreciation in this year.
Capital expenditure deduction
The capital expenditure deduction in connection with the acquisition of a photovoltaic facility, enables small companies
(profit of less than EUR 100,000 in the year are established reserves) to deduct an off-balance-sheet maximum of 40% of the planned capital expenditure (cost of the photovoltaic facility).
This option also exists retroactively for 2008, with the result of reducing income by 40% of acquisition costs of the photovoltaic facility. The capital expenditure deduction will be implemented once and reduces the calculation basis of straight line depreciation. Straight line depreciation is based on the value after offsetting the capital expenditure deduction.
Write-downs
Write downs in line with Article 7g Paragraph 1 of the Income Tax Act allows start-ups to deduct a total of 20% of production costs of the photovoltaic facility in the start-up year and in each of the following 4 years. The distribution of the 20% can be chosen as required in this period and occurs in parallel with straight line depreciation. There is no pro rata annual distribution of the write-down. Thus the full 20% write-down can be totally used, even in December of a particular year.
Conditions for write-down in line with Article 7g of the Income Tax Act:
- Existing business – (founded by notification to the tax authority)
- Fixed assets at the end of the business year
< EUR 204,517 - given as a general rule - Assets remain on year in the business - given
- Facility will used exclusively for operations - given
As a general rule, high depreciation leads to tax losses that can be offset from revenues from other sources of income generated by the operator of the facility.
As a general rule, the facility operator is interested in making depreciation as high as possible at the beginning of the period. For him, this generally means a reduction in tax. One requirement for this is that the operator has taxable income from other sources (for example, wage and salary). The tax reduction is mainly an effect of tax deferral, since a high initial depreciation of leads to correspondingly higher profits during further business operation. For one thing, this form of tax reduction leads to an interest advantage. A further effect of the loss to be accounted for is the reduction of the income tax scale that results in a lower income tax rate for total taxable income in the relevant year.
Factors affecting the choice of the type of depreciation are further development of income and the future tax rate. Sharply increasing income indicates straight line depreciation should be used, while decreases in future income indicate the use of declining balance depreciation. The goal is to shift the profit of the photovoltaic facility resulting from tax in a time-period with a low tax rate (taking advantage of the tax bands).
*All information subject to change