Depreciation

Depreciation in construction refers to the decrease in the value of assets over time due
to wear and tear, obsolescence, or other factors. It is an important concept in the
construction industry and has implications for tax deductions and financial planning.

Depreciation is an important concept in the construction industry in the Philippines. It

involves the allocation of the cost of tangible assets over their useful life, rather than
deducting the cost as an expense in the year of acquisition. In the construction industry,
depreciation is particularly relevant for assets such as buildings, infrastructure, and
equipment.

Tax Depreciation Schedule

 A tax depreciation schedule outlines the deductions available on an investment

property for the purpose of maximizing cash return each tax time 1.
 It covers aspects of the building, including constructions, extensions, alterations,
and improvements of a structural nature.

Rental Property Depreciation

 Real estate depreciation on rental property can lower taxable income, but
determining it can be complex
 It involves two main components: Plant and Equipment (items within the building
like ovens, air conditioners, or carpets) and Building Allowance (construction
costs of the building itself, e.g., concrete and brickwork).

Depreciation Methods and Approval

In the Philippines, the depreciation methods used in the construction industry require
approval from the Bureau of Internal Revenue (BIR). The change of depreciation
methods must be in compliance with the regulations set by the BIR. It is important to
note that special tax privileges may be allowed for certain properties used in specific
industries, such as mining operations.

Construction in Progress (CIP) and Depreciation

Construction in Progress (CIP) refers to assets that reflect the cost of construction work
undertaken but not yet completed. For CIP assets, no depreciation is recorded until the
asset is placed in service. Once construction is completed, the asset should be
reclassified as a building, building improvement, infrastructure, or land improvement
and should be capitalized and depreciated.

Factors for Calculating Depreciation

To calculate depreciation on a fixed asset in the construction industry, the following five
factors must be known:

1. *Cost of the Asset*: This refers to the purchase price of the fixed asset and any other
costs incurred to put the asset into working condition, such as freight, transportation,
installation, commission, and insurance.

2. *Salvage Value*: Also known as the net residual value or scrap value, the salvage value
is the estimated net realizable value of an asset at the end of its useful life. It is
determined by considering the difference between the sale price and the expenses
necessary to dispose of the asset.

3. *Estimated Useful Life*: The estimated useful life is the expected duration over which
the asset is expected to generate economic benefits. It represents the period during
which the asset is expected to be used by the business before it becomes obsolete or no
longer useful

4. *Depreciation Method*: There are various depreciation methods available, such as

straight-line, declining balance, units of production, and sum of years' digits. The choice
of method depends on factors such as the nature of the asset, its expected pattern of
use, and the accounting needs of the business

There are several methods of depreciation commonly used in the construction

industry in the Philippines. These methods include:

1. *Straight-Line Depreciation Method*: This is the most common and

simplest method to use. It involves allocating the cost of an asset evenly
over its useful life. The formula for straight-line depreciation is: (cost of
asset - salvage value) / useful life
2. *Declining Balance Depreciation Method*: This method allows for a higher
depreciation expense in the early years of an asset's life and lower
depreciation in later years. It is often used for assets that are expected to
be more productive in their early years. The formula for declining balance
depreciation varies depending on the chosen rate of depreciation
3. *Units of Production Depreciation Method*: This method calculates
depreciation based on the actual usage or production of the asset. It is
 commonly used for assets that are directly related to production, such as
machinery or equipment. The formula for units of production depreciation
is: (cost of asset - salvage value) / total estimated units of production
4. *Sum of Years' Digits Depreciation Method*: This method allocates more
depreciation in the early years of an asset's life and less in the later years.
It is based on the assumption that an asset is more valuable in its early
years. The formula for sum of years' digits depreciation varies depending
on the chosen number of years.

5. *Depreciation Rate*: The depreciation rate is determined based on the chosen

depreciation method and the estimated useful life of the asset. It represents the
percentage of the asset's cost that is allocated as depreciation expense each year

By considering these factors, businesses in the construction industry can accurately

calculate depreciation for their fixed assets.

Depreciation Reports

 A depreciation report is a valuable tool for making informed decisions about

planning and budgeting of repairs and maintenance on common property or
assets in the construction industry. It provides detailed information, including
estimated lifecycles and replacement costs, enabling planning for short-term
repairs and long-term projects

References:
https://taxacctgcenter.ph/deductible-depreciation-expense-for-income-tax-in-
philippines
https://www.suny.edu/sunypp/documents.cfm?doc_id=559
https://corporatefinanceinstitute.com/resources/accounting/types-depreciation-
methods
https://www.investopedia.com/ask/answers/021815/what-are-different-ways-calculate-
depreciation.asp
https://quickbooks.intuit.com/in/resources/accounting/depreciation-methods/
https://accountants.sva.com/biz-tips/5-depreciation-methods-business-owners-need-
to-know