Depreciation Calculator

What depreciation is and why it matters

Depreciation is the accounting record of the loss in value of a fixed asset through use, the passage of time or obsolescence. The Spanish General Accounting Plan (Plan General de Contabilidad) requires it to be charged systematically according to the asset's useful life, so that each financial year bears its share of the cost.

It has two practical effects. In the accounts, it shows the real net value of assets on the balance sheet. For tax, the annual charge reduces the taxable base for Corporate Income Tax, or the net business income of self-employed people taxed under the direct assessment regime in personal income tax (IRPF), provided it follows the tax criteria.

Calculation methods: straight-line and declining balance

Under the straight-line method the charge is the same every year: annual charge = (acquisition cost - residual value) × annual rate, which is equivalent to dividing the depreciable amount by the years of useful life. It is the most widely used method because it is simple and suits assets that wear out evenly. In the calculator you choose the asset type and, unless you enter a different rate, the maximum rate in the official table is applied; you can enter a lower one as long as it does not fall below the minimum implied by the maximum period, and the final year picks up any remaining balance.

The declining-balance method front-loads depreciation into the early years, which suits assets that lose value quickly, such as IT equipment. The calculator applies the tax method known as the constant percentage method: the chosen straight-line rate is multiplied by 1.5, 2 or 2.5 depending on the depreciation period, and the resulting percentage can never be below 11%; that percentage is applied each year to the remaining balance, and whatever is left is written off in the final year. The option is disabled for buildings, furniture, fixtures and goodwill, which cannot use this method.

The residual value is the amount expected to be obtained for the asset at the end of its useful life, and it is not depreciated. Land is not depreciated either, so for a property the value of the land must be separated from that of the building.

Worked example

A company buys data processing equipment for 4,000 euros, with no residual value, and applies the maximum rate in the table, 25%, which means depreciating it over 4 years. Under the straight-line method, the annual charge is 1,000 euros, and the net book value falls from 4,000 to 3,000, 2,000, 1,000 and 0 euros.

Under the constant percentage method, the 25% rate is multiplied by 1.5 (period under 5 years), giving 37.5%: 1,500 euros is depreciated in the first year; 37.5% of the remaining balance in the second, 937.50 euros; 585.94 euros in the third; and the remaining balance of 976.56 euros in the final year. These are the figures shown in the calculator's table. The total depreciated is the same, but the expense is brought forward to the early years.

If the asset comes into use part-way through the year, the first year's charge must be prorated for the time it has been in use. The calculator's table works in whole years, so in that case the first and last years should be adjusted.

Official tax depreciation tables

Article 12 of Law 27/2014 on Corporate Income Tax sets, for the straight-line method, a maximum rate and a maximum period for each type of asset. Depreciation above the maximum rate is not deductible, and depreciating below the minimum implied by the maximum period may prevent the difference being deducted later. These are some of the values in the table:

• Industrial buildings: 3 per cent (68 years); commercial and office buildings and dwellings: 2 per cent (100 years).
• Installations: 10 per cent (20 years). Furniture: 10 per cent (20 years).
• Machinery: 12 per cent (18 years).
• Transport equipment, such as cars and vans: 16 per cent (14 years).
• Data processing equipment: 25 per cent (8 years); software and computer systems: 33 per cent (6 years).
• Tools and implements: 25 per cent (8 years).

Tax specifics and common mistakes

For tax purposes, the constant percentage declining balance method does not always use a factor of two: the straight-line rate is multiplied by 1.5 if the depreciation period is under 5 years, by 2 if it is between 5 and 8 years, and by 2.5 if it is 8 years or more. It cannot be applied to buildings, furniture or fittings. If the accounts follow a different criterion, the corresponding adjustments must be made in the tax return.

Small companies (empresas de reducida dimensión) may double the maximum rate in the table for new assets, and there is free depreciation for new assets with a unit value of no more than 300 euros, up to an annual limit of 25,000 euros. Intangible assets with a definite useful life are depreciated over that life, while goodwill is tax-deductible up to an annual limit of 5 per cent.

Common mistakes include starting depreciation on the purchase date rather than the date the asset comes into use, depreciating the value of land, forgetting to prorate the first year, and including recoverable VAT in the depreciable value, when it is not part of the asset's cost.