Rules of Depreciation Calculation
5/15/2020
Bases and Rules of Depreciation Calculation (Article 18 of CIT law, 2010)
Being aware of depreciation can help individuals make more informed decisions when buying and selling physical assets, as it allows for a better understanding of how value may change over time. By considering depreciation, investors can better assess the potential risks and rewards associated with owning tangible assets.
Depreciation is a key aspect of tax planning for businesses, as it allows for a reduction in taxable income by accounting for the wear and tear of assets over time.
- The depreciations stated in articles (16/17) of the law shall be applied according to the following bases and rules:
- The historical cost of fixed assets shall be adopted as the basis for depreciation calculation which includes expenses spent on the asset until it is totally ready for use. In addition, all capital costs for renewing or developing the asset shall be deemed as an integrated part of the historical cost of the fixed asset
- The Straight-line-method is the approved method for depreciation collection according to the law and this Executive Regulation.
- The new fixed assets that have been used in production shall not have a depreciation premium.
- The depreciation premium shall be part of the product or service cost which is calculated accordingly regardless of the activity income whether profit or loss.
- The depreciation rates set forth in article (16) of the law for the purpose of tax calculation shall not be exceeded.
- The depreciation calculation shall be on the basis of fixed assets items separately according to categories stated in article (16) of the law.
- Establishment expenses shall be depreciated within five years.
- Apart from the cases related to financial lease and in a manner not inconsistent with depreciation rates as per article (16) of the law, the entity shall continue calculating depreciation premium (payments) for its leased assets to others as if they were actually in its possession, considering their operating conditions by the lessee and the income arising from lease is considered as an income for the leased company.
- The taxpayer shall keep regular accounts.
- For tax purposes the entity shall have an asset card in which all asset’s transactions including additions, renewals and improvement whether for the purpose of developing or extending the useful life shall be confirmed as well as any data or information related to the asset including the annual depreciation and its calculation rates according to the provisions of this law.
- As per the provisions of article (16) of this law, the following shall be considered while deduction:
- Depreciation Calculation for tax purposes shall not exceed the rates and percentages set out in article (16) of the law regardless of what mentioned in any other law.
- Providing information on the assets claimed for their depreciation deduction as per the form prepared by the Tax Authority for this purpose.
- The land value shall not be subjected to depreciation, works of art, souvenir, jewelry and any other assets which are not depreciable naturally.
- The total deduction for depreciation and damage shall not exceed the original cost.
- The annual depreciation per year shall be added to the allocation depreciation for each asset.
- The purchased intangible or abstract assets set forth in paragraph (b) / the second item / article (16) of this law, means the assets which don’t have physical tangible existence and kept for utilization in production, importing goods, services or leasing to others such as license, intellectual property rights, trade name, Copyright, patents and animation the company obtains in return of an amount. On the other hand, the intangible assets established or its value paid by the entity’s knowledge shall be depreciated as per item (b) article (16) of the law. In addition, the costs of creating intangible assets which were recorded within the previous year’s costs shall be excluded according to accounting procedures adopted in the Republic and in case those standards are not applicable, the international standards may be applied in accordance with the law provisions and legislation in force in the Republic.
- No depreciation shall be calculated for intangible assets which have no financial cost or value whatever their source whether established by the entity’s knowledge without costs or acquired from others without financial compensation.