Some investments can be deducted in the accounts immediately. Others must be ‘depreciated’, which means that the expense is deducted gradually over a number of years.
If you make substantial investments in your business, you may need to depreciate (deduct) the assets/investment gradually over time. You need to consider whether the investment should be depreciated or if the investment can be recorded as an expense immediately.
When you depreciate an asset, it means in practice that you recognise the fall in value of the asset as a deduction as it is used and becomes worn.
Different rules apply to depreciation for accounting purposes and for tax purposes. Enterprises that are only subject to the bookkeeping obligation need only comply with the tax rules. This applies to most sole proprietorships. Enterprises which are subject to the annual accounts obligation must also comply with the provisions of the Accounting Act. All limited companies are for example subject to the accounting obligation.
Small enterprises can choose
Enterprises with an accounting obligation, which are small as defined in the Accounting Act, can opt to apply the tax rules for depreciation if this gives a reasonable depreciation schedule.
Tax depreciation rules
The tax rules state that significant fixed assets and investments must be depreciated using reducing balance depreciation. Under the tax rules, an asset is considered to be significant and fixed when it is expected to have a useful life of at least three years and has a cost price of at least NOK 15,000.
In the case of reducing balance depreciation, you must depreciate a fixed percentage of the asset's residual value every year. It does not matter when in the year the asset is purchased or taken into use. If you purchase the asset in December, you must still deduct the full percentage for the financial year concerned.
Example of reducing balance depreciation
Per Hansen purchases a large photocopier for his business. It costs NOK 50,000 (excluding VAT). A photocopier comes under balance group A (office equipment, etc.) and must be depreciated at the rate of 30% of the residual value every year.
The depreciation for tax purposes will then be as follows:
First year of depreciation: NOK 50,000*30% = NOK 15,000 - residual balance NOK 35,000
Second year of depreciation: NOK 35,000*30% = NOK 10,500 - residual balance NOK 24,500
Third year of depreciation: NOK 24,500*30% = NOK 7,350 - residual balance NOK 17,150
Fourth year of... etc.
In practice, the residual value will never reach zero, but when the balance falls below NOK 15,000 (before the depreciation for the year) on each individual balance, the residual value can be deducted in full or in part as desired.
In accordance with the Accounting Act, assets intended 'for long-term ownership or use' must be depreciated. No precise limit is set as regards when an asset must be depreciated, as in the case of depreciation for tax purposes. However, the limit specified in the tax rules is often also used as a basis for assessing when an asset must be depreciated for accounting purposes.
(NOK 15,000 excluding VAT and products over 3 years).
The Accounting Act states that an asset/investment must be depreciated according to a 'sensible depreciation schedule'. The depreciation period must be assessed for each individual investment. Often, the cost price is divided into equal amounts over the estimated useful life of the asset. This is also known as linear depreciation. If the asset is purchased in November, you will normally only deduct for two twelfths of the year for accounting purposes.
Example of accounting depreciation
Bedriften AS must follow the accounting rules for depreciation. Managing Director Kari Hansen buys a photocopier in November for NOK 50,000. She believes that a sensible depreciation schedule would be to depreciate the photocopier over three years, with equal amounts each year.
First year of depreciation: NOK 50,000/3 = NOK 16,667 For Nov/Dec = NOK 16,667/12*2 = NOK 2,777
Second year of depreciation: NOK 50,000/3 = NOK 16,667
Third year of depreciation: NOK 50,000/3 = NOK 16,667
Fourth year of depreciation: NOK 50,000/3 = NOK 16,667 For Jan - Oct = NOK 16,667/12*10 = NOK 13,889
After three years from the purchase date, the entire amount will be fully depreciated or written off.
In some cases, enterprises which are subject to the accounting obligation must therefore comply with different requirements as regards which figures must be used for tax purposes and which figures must be used for accounting purposes. This leads to a difference between the taxable result and the accounting result. This is normally adjusted against a balance account, which is often called 'deferred tax asset' or 'deferred tax liability'. Over time, this will reach zero.