Depreciation of Depreciable Assets and Business Intangibles

Posted in Know How

           When you run a business in Ethiopia, one of the greatest advantages you have is the ability to know depreciation of depreciable assets and business intangibles. As you complete your business taxes, you may be gathering information and wondering what is depreciable and what is not. Not all business expenses are deductible. Deducting ineligible expenses can cause you to owe back taxes as well as late fees and penalties. I wrote this to minimize such problems and to clarify depreciation of depreciable assets and business intangibles according to Federal Income Tax Proclamation No. 979/2016 and Council of Ministers Regulations 2017 on the Federal Income Tax. It is important to know that not all expenses that are taken up in your accounting books can be allowed for tax deductions.

Clues on Depreciation of Depreciable Assets and Business Intangibles

   In determining the taxable income of a taxpayer for a tax year, the taxpayer shall be allowed a deduction for the amount by which the depreciable assets and business intangibles of the taxpayer declined in value during the year through use in deriving business income.

   The amount by which the depreciable assets or business intangibles of a taxpayer decline in value during a tax year shall be computed in accordance with the Regulations to be issued by the Council of Ministers.

   If a taxpayer does not use a depreciable asset or business intangible for the whole of a tax year in deriving business income, the amount allowed as a deduction shall be reduced by the proportion of the year that the asset was not so used.

   If a taxpayer uses a depreciable asset or business intangible during a tax year partly to derive business income and partly for another use, the amount allowed as a deduction shall be the proportion of the amount computed after taking account of any adjustment that relates to the derivation of business income.

   If a taxpayer has used a depreciable asset or business intangible partly in deriving business income and partly for another use and the taxpayer disposes of the asset or intangible during a tax year, the amount of the gain or loss on disposal shall be the fair proportional part of the gain or loss that relates to the derivation of business income.

   The depreciation of a depreciable asset or business intangible shall commence when the asset or intangible is ready and available for use in deriving business income, but, in the case of a building constructed by a taxpayer, not before the regulatory authority has issued the taxpayer with a certificate of completion for the building.

Assets shall be depreciated only under the straight-line method

 The following assets shall be depreciated only under the straight-line method:

a)  A business intangible:

“Business intangible” means any of the following when used wholly or partly to derive business income:

     I.   a copyright, patent, design or model, plan, secret formula or process, trademark, or other like asset or right that has a limited useful life;

    II.  a customer list, distribution channel, or unique name, symbol or picture, or other marketing intangible that has a limited useful life;

 III.  contractual rights (including arising as a result of a prepayment of an expenditure) with a benefit for a limited period, but which exceeds one year;

 IV. an expenditure that provides an advantage or benefit for a period of more than one year, but not including expenditure incurred to acquire any tangible movable or immovable asset.

b)  A structural improvement:

“Structural improvement” means a building or any other addition or alteration to immovable asset that becomes part of, or is permanently affixed to, the immovable asset including a road, driveway, car park, fence, or wall. For the  purposes of calculating the  depreciation deduction in  relation  to  a structural  improvement, the  cost  of the structural  improvement shall not include  the  cost of the land  on which  the  improvement is  situated. No depreciation  deduction  shall  be  allowed  for  the  cost of a depreciable asset  or business intangible  acquired  by a taxpayer  from  a related person ("transferor") when the  cost  of  the  asset  or intangible  had  been  fully depreciated by the transferor.

Straight-line Depreciation

The  depreciation deduction allowed  to  a taxpayer  for  a tax  year in  respect  of a depreciable asset  or  business  intangible  under the  straight-line method shall be calculated by applying the  rate  specified  in  Council of Ministers Regulations 2017 on the Federal Income Tax against  the  cost  of the  asset. The total  deductions  allowed,  or that  would be allowed  to  a taxpayer  in  respect  of a depreciable asset for  the  current  tax year and  all previous  tax  years  shall  not exceed  the  cost of the  asset.

  Diminishing Value Depreciation

The  depreciation deduction allowed  to  a taxpayer  for  a tax  year  in  respect  of a depreciable asset  under  the  diminishing  value method shall be calculated  by  applying the  rate specified  in  Article  39 of   Council of Ministers Regulations 2017 on the Federal Income Tax against  the  net book value  of the  asset  at the beginning of the  year.  The net  book  value  of the asset  shall  be calculated on the  basis that  the  assert  has been  used  in  that  year solely to  derive  business  income. If  the  balance  of a depreciable  asset  of  the  taxpayer  is  not more  than 2000  Birr,  the  amount  shall  be  fully  deducted in  the  tax  year to  which the  balance  corresponds.

  Rates of Depreciation

The  rates  of  depreciation  applicable  to  a depreciable  asset  are  specified  in the  following  table  based  on  the  following  categories:

Depreciable  Asset

Straight-line Rate

Diminishing Value Rate

Computers,  software, and data  storage  equipment

20%

25%

Greenhouses

10%

-

Structural  improvement other than  a greenhouse

5%

-

Any other  depreciable  asset

15%

20%

Depreciable asset  used  in mining  and  petroleum development  operations

25%

 

30%

 

The rate of depreciation application to a business intangible shall be for preliminary expenditure, 25%; for  a business intangible  with a useful  life  of  more than  10 years, other  than  a business  intangible  referred  to  in  sentence (a), 10% and for any other  business  intangible, 100% divided  by the  useful  life of the  intangible.

Depreciation allowed on a building used partially as a business asset

Depreciation on a building used partially as a business asset shall be allowed only in proportion to the portion of the property used as a business asset.

  Repairs and Improvements

A taxpayer shall be allowed a deduction for a tax year for the cost of a repair or improvement made to a depreciable asset during the year. The amount of the deduction allowed under shall not exceed 20% of the net book value of the asset at the end of the tax year. If the cost of a repair or improvement made to a depreciable asset during the year exceeds 20% of the net book value of the asset, the whole cost of the repair or improvement shall be added to the net book value of the asset.

In general, depreciation of depreciable assets and business intangibles are you can subtract from your taxable gross income. Depreciable asset are business assets which can be depreciated. Deductible expenditures reduce your tax liability. A non-deductible expense, on the other hand, does not impact your tax. Certain expenses are always deductible, while others can never be deducted. The money you spend on personal consumption, expenditure a donation or gift except as provided for in Proclamation 979/2008 and so on cannot be subtracted from your taxable income base.

 

 

 

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