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Depreciation using the straight-line method and deduction of repair expenses from income — DIFFERENT RULES
Depreciation using the straight-line method and deduction of repair expenses from income — DIFFERENT RULES
One of the amendments and additions to the Tax Code that will enter into force from 2026 concerns the implementation of horizontal monitoring. Under this change, taxpayers admitted to horizontal monitoring will be allowed to apply the straight-line method of depreciation for their fixed assets. The question arises: how should calculations be made if a taxpayer applying the straight-line depreciation method incurs capital or current repair expenses for fixed assets? This update is explained by tax expert Tahmaz Gachayev.
When depreciation is calculated using the straight-line method, the initial cost of a fixed asset is divided by its established useful life. According to Article 114.3-1 of the Tax Code, annual depreciation periods for depreciable assets under the straight-line method are determined as follows:
- capitalized expenses for land improvements, buildings, structures, and installations — 44 years;
- machinery and equipment — 14 years;
- high-technology computer and computing equipment — 11 years;
- air, railway, and water transport vehicles — 29 years;
- production and sports vehicles, sports motorcycles, sports bicycles, and other similar sports transport vehicles — 9 years;
- service vehicles — 19 years;
- motor vehicles — 14 years;
- working animals — 14 years;
- expenses for geological exploration and preparation for the extraction of natural resources — 11 years;
- intangible assets — 10 years for those with an unknown useful life, and according to the useful life for those with a known period;
- other fixed assets — 14 years.
Example 1: A taxpayer applying the straight-line depreciation method purchases equipment with an initial cost of 70,000 manats. The useful life of the equipment is determined as 14 years. The depreciation expense for the first year will be:
70,000 ÷ 14 = 5,000 manats.
Taxpayers applying the straight-line method must be particularly careful when incurring capital or current repair expenses for fixed assets.
According to Article 114.11.3 of the Tax Code, annual depreciation under the straight-line method is calculated by dividing the initial cost of fixed assets by the useful life established under Article 114.3-1 of the Code. When applying this method, capital repair expenses and the portion of current repair expenses exceeding the limitation set out in Article 115.9 of the Code are added to the initial cost of the fixed assets. The resulting value is divided by the established useful life, and the obtained amount is deducted from income in equal portions each year starting from the year in which the repair is carried out.
In other words, capital repair expenses or the portion of current repair expenses exceeding the prescribed limit should be added to the initial cost of the fixed asset, not to its residual value at the end of the year.
Example 2: Equipment with an initial cost of 70,000 manats was depreciated for one year in the previous period:
70,000 ÷ 14 = 5,000 manats.
In the current year, the residual value of the equipment is 65,000 manats (70,000 − 5,000), and the remaining useful life is 13 years. During the current year, the taxpayer incurred capital repair expenses of 9,000 manats for this equipment. These expenses are not deducted directly from income but are added to the initial cost of the fixed asset:
70,000 + 9,000 = 79,000 manats.
The newly formed value is then divided by the initially determined useful life of the asset:
79,000 ÷ 14 = 5,642.8 manats.
The resulting amount is allocated in equal portions over the remaining useful life starting from the year of repair:
5,642.8 ÷ 13 = 434.06 manats.
At the same time, the depreciation expense for the current year is calculated as follows:
65,000 ÷ 13 = 5,000 manats.
The total depreciation expense deductible from income will be 5,434.06 manats:
5,000 + 434.06 = 5,434.06 manats.
This approach continues in subsequent years, and the straight-line method is not violated.
If capital repair expenses were added to the residual value for the current year and depreciation were calculated on that basis, the straight-line method would be breached, resulting in calculations contrary to the relevant provisions of the Tax Code.
One of the amendments and additions to the Tax Code that will enter into force from 2026 concerns the implementation of horizontal monitoring. Under this change, taxpayers admitted to horizontal monitoring will be allowed to apply the straight-line method of depreciation for their fixed assets. The question arises: how should calculations be made if a taxpayer applying the straight-line depreciation method incurs capital or current repair expenses for fixed assets? This update is explained by tax expert Tahmaz Gachayev.
When depreciation is calculated using the straight-line method, the initial cost of a fixed asset is divided by its established useful life. According to Article 114.3-1 of the Tax Code, annual depreciation periods for depreciable assets under the straight-line method are determined as follows:
- capitalized expenses for land improvements, buildings, structures, and installations — 44 years;
- machinery and equipment — 14 years;
- high-technology computer and computing equipment — 11 years;
- air, railway, and water transport vehicles — 29 years;
- production and sports vehicles, sports motorcycles, sports bicycles, and other similar sports transport vehicles — 9 years;
- service vehicles — 19 years;
- motor vehicles — 14 years;
- working animals — 14 years;
- expenses for geological exploration and preparation for the extraction of natural resources — 11 years;
- intangible assets — 10 years for those with an unknown useful life, and according to the useful life for those with a known period;
- other fixed assets — 14 years.
Example 1: A taxpayer applying the straight-line depreciation method purchases equipment with an initial cost of 70,000 manats. The useful life of the equipment is determined as 14 years. The depreciation expense for the first year will be:
70,000 ÷ 14 = 5,000 manats.
Taxpayers applying the straight-line method must be particularly careful when incurring capital or current repair expenses for fixed assets.
According to Article 114.11.3 of the Tax Code, annual depreciation under the straight-line method is calculated by dividing the initial cost of fixed assets by the useful life established under Article 114.3-1 of the Code. When applying this method, capital repair expenses and the portion of current repair expenses exceeding the limitation set out in Article 115.9 of the Code are added to the initial cost of the fixed assets. The resulting value is divided by the established useful life, and the obtained amount is deducted from income in equal portions each year starting from the year in which the repair is carried out.
In other words, capital repair expenses or the portion of current repair expenses exceeding the prescribed limit should be added to the initial cost of the fixed asset, not to its residual value at the end of the year.
Example 2: Equipment with an initial cost of 70,000 manats was depreciated for one year in the previous period:
70,000 ÷ 14 = 5,000 manats.
In the current year, the residual value of the equipment is 65,000 manats (70,000 − 5,000), and the remaining useful life is 13 years. During the current year, the taxpayer incurred capital repair expenses of 9,000 manats for this equipment. These expenses are not deducted directly from income but are added to the initial cost of the fixed asset:
70,000 + 9,000 = 79,000 manats.
The newly formed value is then divided by the initially determined useful life of the asset:
79,000 ÷ 14 = 5,642.8 manats.
The resulting amount is allocated in equal portions over the remaining useful life starting from the year of repair:
5,642.8 ÷ 13 = 434.06 manats.
At the same time, the depreciation expense for the current year is calculated as follows:
65,000 ÷ 13 = 5,000 manats.
The total depreciation expense deductible from income will be 5,434.06 manats:
5,000 + 434.06 = 5,434.06 manats.
This approach continues in subsequent years, and the straight-line method is not violated.
If capital repair expenses were added to the residual value for the current year and depreciation were calculated on that basis, the straight-line method would be breached, resulting in calculations contrary to the relevant provisions of the Tax Code.