Property, plant and equipment (PPE) are tangible or physical assets acquired and owned by the company which will be used for more than one year and are not held for resale. Normally, companies acquire PPE to be used directly or as support to its operations whether it may be for production or administrative purposes.
The value of certain PPEs like buildings and machines declines over time due to normal wear and tear mostly because of usage in operation or obsolescence. A computation of depreciation is done which will be deducted to the capitalized asset (PPE) in order to determine its remaining value.
Depreciation is an accounting process of allocating the value of PPE over its life expectancy or useful life. This is to recognize and match an expense to the generated revenue for the usage of PPE. It also refers to the reasonable allowance for exhaustion, wear and tear of the property, plant and equipment. Thus, depreciation is a deductible expense that a taxpayer shall recognize on its financial statements and tax returns. The taxable income of the taxpayer will be reduced by the corresponding depreciation resulting to a lower income tax or a tax benefit on the part of the taxpayer.
USEFUL LIFE AND DEPRECIATION METHOD
The useful life represents the life expectancy, normally the number of years or units produced, the PPE will be used in the operations of the company.
Below are different methods of depreciating the property, plant and equipment:
- The straight-line method
- Declining-balance method
- The sum-of-the-years-digit method; and
- Any other method which may be prescribed by the Secretary of Finance upon recommendation of the Commissioner
There are no specific rules issued regarding the useful life and method of depreciation to be used for the properties of the company. Thus, these will be dependent on management’s judgement based on its operation, experience or industry standards. Should taxpayers intend to change the useful life and the depreciation method of its property, plant and equipment, they must seek first the approval of the Bureau of Internal Revenue.
In general, the depreciable PPE should be substantiated with a valid Receipt in order to claim the depreciation of a property for income tax purposes. There should also be proper invoicing, this means that the valid Receipt is properly filled out and is named to the taxpayer along with its Tax Identification Number (TIN), address and business style.
LIMITATIONS ON THE DEPRECIATION OF VEHICLES
Under Revenue Regulation 12-2012, depreciation expense of the vehicles of the company is deductible for income tax purposes. However, under section 3 of the RR 12-2012, there are limitations and requirements imposed as follows:
- No deduction from gross income for depreciation shall be allowed unless the taxpayer substantiates the purchase with sufficient evidence, such as official receipts or other adequate records which contain the following, among others:
- Specific Motor Vehicle Identification Number, Chassis Number, or other registrable identification numbers of the Vehicle;
- The total price of the specific Vehicle subject to depreciation; and
- The direct connection or relation of the Vehicle to the development, management, operation, and/or conduct of the trade or business or profession of the taxpayer;
- Only one Vehicle for land transport is allowed for the use of an official or employee, the value of which should not exceed Two Million Four Hundred Thousand Pesos (PhP2,400,000);
- No depreciation shall be allowed for yachts, helicopters, airplanes and/or aircrafts, and land vehicles which exceed the above threshold amount, unless the taxpayer’s main line of business is transport operations or lease of transportation equipment and the vehicles purchased are used in said operations;
- All maintenance expenses on account of non-depreciable Vehicles for taxation purposes are disallowed in its entirely;
- The input taxes on the purchase of non-depreciable Vehicles and all input taxes on maintenance expenses incurred thereon are likewise disallowed for taxation purposes.
An allowed deduction is a tax benefit which can be used to lower the taxes to be paid by a taxpayer without compromising its tax obligations. The exercise of prudence should be always in check so that the claimed deductions on the tax returns are within the limits and compliant with the updated rulings issued by the BIR.