Suspension of depreciation

What it means

Suspending depreciation means leaving tax depreciation unclaimed for one or more tax periods and picking it up later as if nothing had happened. The depreciation period is extended by the suspended years, and nothing is lost from the entry price.

It is a tax device only. Accounting depreciation runs on under the depreciation plan, because the asset keeps wearing out; the suspension simply pulls the accounting and tax residual values apart, and the gap has to be tracked until disposal.

Suspension does not mean the unclaimed allowance is later added to another year. When depreciation resumes, it continues with the annual amount that the original schedule assigns to the next year of depreciation, under straight-line depreciation the same sum, and the final instalment is simply claimed later.

How it works in practice

Only a whole tax period can be suspended, never part of one, and the decision is taken while the return is being prepared. Suspension is mandatory for a period in which the asset was not used to secure taxable income. A taxpayer claiming lump-sum expenses, by contrast, does not suspend at all: for those years the depreciation is merely kept on record, and the depreciation period is not extended by them.

The usual case is a loss year: a loss can be carried forward only for a limited time and up to a limited share, while depreciation parked by a suspension is subject to no time limit at all. The deduction moves to years with something to deduct it from.

When preparing the return for a loss-making or weak year, we compare two versions with the client, with depreciation and with suspension, and weigh when the company expects profit. In the asset register we then mark which items were suspended, so the tax written-down value still adds up years later on sale or disposal.

What to watch out for

The mistake that surfaces years later is suspending the accounting depreciation as well. The accounts then show more assets and more profit than exist, and when the asset is sold the calculation starts from the wrong residual value, so the tax base on the sale comes out wrong.

The opposite mistake is continuing to depreciate an asset that was not used in the business all year, such as a car driven only privately by the owner. Suspension is then mandatory, so that year’s allowance is a non-deductible expense and an inspection will assess the tax with a penalty.