Reintroduction of the Reducing Balance Method of Depreciation of Movable Assets

The second German Coronavirus Tax Relief Act restores the possibility, urgently demanded by the business community, of using the declining balance method of depreciation on movable fixed assets.

The legislator has determined the upper limit of the reducing balance depreciation at a factor of 2.5 of the permissible straight-line depreciation for the asset in question. The reactivation of section 7 (2) of the German Income Tax Act (EStG) thus allows movable fixed assets to be depreciated using the declining balance method with up to 25 percent of the (residual) book value instead of the straight-line method, but no more than 2.5 times the straight-line method. However, the option of using the reducing balance method of depreciation is limited to assets which are acquired or manufactured in the years 2020 and 2021.

Although the increased depreciation option is not a direct liquidity aid, tax-deductible depreciation is brought forward and reduces the potential tax burden earlier than with straight-line depreciation. A higher loss carryback potential will also be created, which may have an effect through the improved loss carryback possibilities also established by the second Coronavirus Tax Relief Act. In addition to the immediate effect of the tax savings or de facto tax deferral, this should also create incentives to carry out or bring forward investments.

The introduction of the reducing balance method of depreciation on movable fixed assets is one of several options introduced by the legislator to enable companies to reduce their tax burden in an individually controlled manner in the context of the coronavirus crisis. Companies are advised to examine all newly created possibilities for their suitability in individual cases. Since the short-term reduction in profit due to the reducing balance method of depreciation turns out to be the opposite in later years, the various measures should be considered and planned in combination.

Matthias Ohmer

Diljinder Singh Walia