Tax written-down value

What it means

The tax written-down value is the part of a tangible or intangible asset’s value not yet claimed as a tax expense. It is the tax entry price, usually the acquisition cost, less all the tax depreciation claimed so far.

It differs from the accounting net book value because accounting and tax depreciation follow different rules. Accounting depreciation reflects actual wear, tax depreciation is set by law according to the depreciation group, and the gap between them is shown in the accounts as deferred tax.

The tax written-down value increases by any improvement and stays unchanged in years when the company suspends depreciation. After the last charge it is zero and the asset continues in use with no effect on tax.

How it works in practice

It matters most on the disposal of an asset. On a sale the tax written-down value is a deductible expense set against the sale price as taxable income, so only the real gain on the sale is taxed.

When a destroyed or unusable asset is scrapped, it is deductible if the disposal is supported by a record and a reason. For shortages and damage it is deductible only up to the compensation from an insurer or the person responsible, except for damage by an unknown perpetrator confirmed by the police.

In the fixed asset register we keep the accounting and tax values of each item separately. On an audit and when taking over a new client’s books we reconcile tax written-down values with previous returns, because errors in them carry into every later year.

What to watch out for

When selling a car or machine at a loss, companies often assume the whole tax written-down value will be deductible. For passenger cars with a higher entry price, however, the law restricts both tax depreciation and the expense on sale, and the difference has to be added back to the tax base.

If a company did not claim depreciation in some year, that is a suspension of depreciation and the tax written-down value does not fall that year. Missed charges cannot be caught up all at once in one year, however, so when taking over books we check that suspensions were recorded consistently in the register and the returns.