Accounting Depreciation: Legal Methods and Best Practices

Depreciation is not an arbitrary spreading of an expense. It is the accounting recognition of the consumption of the expected economic benefits of an asset. This definition governs everything else: the useful life used must reflect the actual use of the asset, not a tax optimum. The divergence between what accounting requires and what tax rules allow is precisely what makes the topic technical — and what accounts for most tax adjustments.

The depreciable base and the useful life

The depreciable base is the entry value of the asset less its residual value, meaning the amount the company would obtain from disposing of it at the end of its use. This residual value is only taken into account if it is both significant and measurable — which, in practice, limits it to a few categories such as vehicles or certain equipment with an active secondary market.

The useful life is the period of use expected by the company, assessed asset by asset. It should not be confused with the technical service life of the equipment: a machine usable for fifteen years but which the company plans to replace after seven is depreciated over seven years.

An allowance exists for small businesses, which may use the useful lives accepted for tax purposes rather than the actual period of use. This simplification eases the burden of justification, but it does not exempt the company from revising the depreciation schedule when the conditions of use change significantly.

Depreciation methods

The straight-line method spreads the base evenly over the useful life. It is the standard method, applicable to any depreciable asset, and the only one permitted absent justification for a different consumption pattern.

The declining-balance method concentrates the deduction in the earlier years, by applying a coefficient to the straight-line rate. It is reserved for certain new assets that are specifically listed, and it is a tax-driven method rather than an accounting one: when it does not match the actual consumption pattern, the difference from the accounting depreciation is recorded as an excess tax depreciation (amortissement dérogatoire).

Units-of-production depreciation, calculated based on units of activity — machine hours, kilometers, units produced — is the most economically accurate method when use is irregular. It requires effective tracking of these units, without which it cannot be justified.

The component approach

This is the obligation most frequently overlooked in small businesses, and it is not optional.

When an asset includes significant components with different useful lives, these components must be recorded and depreciated separately. A building is thus broken down into structural shell, facade and waterproofing, technical installations, and fixtures — each with its own useful life.

The issue is not just one of compliance. The replacement of a component is capitalized and depreciated over its new useful life, while the net book value of the replaced component is removed from the balance sheet. Without this breakdown, the same replacement is expensed, and a tax audit will reclassify it as a capital asset, with the usual consequences described in our article on tax audits.

What cannot be depreciated

Three categories come up systematically:

• Land, the value of which is not consumed. When acquiring a built property, splitting the price between land and building is mandatory, and an allocation that is clearly unbalanced will be corrected.
• Goodwill (fonds commercial), not depreciable in principle, except when its useful life is limited and determinable. A regulated exception exists for small businesses.
• Financial assets, which are subject to impairment rather than depreciation.

The distinction between depreciation and impairment is fundamental: depreciation reflects an expected and planned consumption, while impairment reflects an unforeseen loss of value. An asset can be subject to both — the reasoning is the same as that described for provisions.

Tax limits

Three rules limit the deduction, regardless of the accounting treatment used.

The starting point is the date the asset is placed in service for straight-line depreciation, while the declining-balance method runs from the first day of the month of acquisition. Depreciating an asset that has been acquired but not yet placed in service is a classic mistake.

Passenger vehicles are subject to a cap on deductible depreciation, the amount of which varies according to the vehicle's emissions. The excess portion must be added back outside the accounts each year.

Minimum depreciation is the least-known and most costly rule. At the close of each fiscal year, a company must have recorded a cumulative amount of depreciation at least equal to the cumulative amount that would result from the straight-line method. Depreciation that has been improperly deferred — that is, not recorded when it should have been — is permanently lost for deduction purposes. Deferring depreciation to improve a loss-making result does not postpone it: it eliminates it.

Usage scenarios

Acquisition of a building. Split the price between land and building, then break down the building into components. This is the moment when the breakdown is straightforward; reconstructing it five years later at the time of renovation work is considerably harder.

Loss-making fiscal year. Do not suspend depreciation. The minimum depreciation rule turns an apparent deferral into a permanent loss of the right to deduct.

Replacement of equipment. Check whether the replaced asset constituted an identified component. If so, the replacement is capitalized and the residual value of the outgoing component is recorded as an expense. The related documentation discipline falls under bookkeeping.

Frequently asked questions

What useful life should be used? The actual period of use expected by the company, assessed asset by asset. Small businesses may use the useful lives accepted for tax purposes, which simplifies the justification without exempting them from revising the schedule if usage changes.

Straight-line or declining-balance? The straight-line method is the standard approach. The declining-balance method is reserved for certain new assets and follows a tax-driven logic: when it diverges from the actual consumption pattern, the difference is recorded as an excess tax depreciation (amortissement dérogatoire).

Is land depreciated? No. When purchasing a built property, splitting the price between land and building is mandatory, and an unbalanced allocation will be corrected.

Can depreciation be suspended in a loss-making year? Not without consequence. The cumulative amount recorded must remain at least equal to the straight-line cumulative amount, otherwise the deferred portion is permanently lost for deduction purposes.

What is component depreciation? The separate recording and depreciation of significant components of an asset that have different useful lives. It is mandatory as soon as these conditions are met, and is not optional.

How is a vehicle depreciated? Like any other asset, but the deductible portion is capped for passenger vehicles, according to a scale linked to emissions. The excess must be added back each year.

Key takeaways

Depreciation is justified by the actual use of the asset, never by a target for financial results. Three points account for most tax adjustments, and all of them are settled at the time the asset is recorded rather than at the time of an audit.

The allocation comes first — land and building, then components — which determines the treatment of all subsequent replacements. Then the consistency of the useful life, which must be explainable by more than just a reference to a table. And finally, minimum depreciation, which means that depreciation not recorded in time is not deferred but lost. These choices fit within the broader framework of corporate taxation, where the quality of documentation determines what survives an audit.