Fixed Asset Depreciation: From Cost Base to Deductible Expense

Depreciation looks like the simplest calculation in accounting: a rate multiplied by a number. Yet it is one of the expenses most often added back during a tax assessment. This is written for accountants and finance managers of Iranian businesses with significant fixed assets who need to calculate, document and defend the charge.

What depreciation actually measures

Depreciation is the systematic allocation of an asset's cost to the periods that benefit from it — an allocation entry, not a valuation. It neither reports market value nor sets aside cash for replacement. In an inflationary economy the net book value of a machine may become a small fraction of its replacement price, and that gap is what inflates book profit and misleads pricing.

The legal basis is Article 149 of the Direct Taxes Act: assets whose value declines through use or the passage of time, together with formation costs, are depreciable, and the charge is a deductible expense. The schedule of rates and the rules for applying it are prepared by the Tax Administration in accordance with accounting standards and approved by the Minister of Economic Affairs and Finance. Take the class and rate for each asset from the latest issued schedule, not from last year's spreadsheet.

Get the cost base right first

Cost includes the purchase price, non-refundable customs duties, freight, transit insurance, installation and commissioning, and direct site preparation. It does not include user training, operating losses after the asset is ready for use, or unattributable administrative overhead.

Two corrections I make in most files:

• Split land from buildings. Land is not depreciable; failing to separate it produces excess depreciation and a disallowed expense.
• Split components with different lives. A production line may combine structure, equipment and control systems with very different useful lives. Booking them as one line loses both the analysis and the replacement planning.

Choosing a method

For tax purposes the method and rate must align with what the schedule prescribes for that asset class. Where your genuine estimate of useful life differs, apply the real estimate in the books and disclose the difference in the reconciliation between accounting profit and taxable income. It is a timing difference that reverses over the asset's life.

Start, stop and the manufacturing nuance

Depreciation begins when the asset is installed and ready for use, not when it is invoiced or received. It stops on disposal, retirement or full depreciation. A temporary production halt does not by itself stop the charge, but the schedule sets its own rules for idle assets.

For manufacturers, depreciation on plant machinery and factory buildings is manufacturing overhead and belongs in product cost. Booking it to general administrative expense understates both cost of sales and closing inventory — an error covered in the product costing guide.

Repairs: capitalise or expense

The defensible test: if the spending increases future economic benefits relative to the asset's original condition, capitalise; if it merely maintains that condition, expense.

Revaluation — the trap

Many companies revalue assets to improve the balance sheet and their financial ratios. What is often missed is that depreciation on the revaluation uplift is not an accepted deductible expense. After a revaluation you effectively carry two depreciation bases, book and tax. If your system does not separate them, every year becomes a manual and error-prone calculation. The tax consequences and conditions are covered in capital increases and asset revaluation.

Disposal and retirement

On sale, the difference between proceeds and net book value is a gain or loss on disposal. Record depreciation up to the disposal date and remove cost and accumulated depreciation together; for scrapping, prepare a signed minute with technical, warehouse and finance representatives present. Property transfer tax obligations are separate from corporate income tax and fall due at transfer.

What gets disallowed

1. No valid invoice or ownership document for the asset.
2. Depreciating land, or an asset not yet commissioned.
3. Using outdated rates instead of the current schedule.
4. Assets registered in the owner's personal name but depreciated in the company's books.
5. Capitalising routine repairs, or expensing a major overhaul.
6. Deducting depreciation on a revaluation surplus.
7. No fixed asset register reconcilable to the general ledger balance.

Point four deserves attention: a vehicle held in an individual's name but depreciated by the company is almost always rejected. The root cause is usually a failure of separating personal and company finances.

Fixed asset file checklist

1. Maintain a register with unique asset codes, commissioning dates, cost and location.
2. Tag assets physically and count them annually.
3. Keep ownership documents and purchase invoices in each asset's file.
4. Align ledger classification with the schedule's asset classes.
5. Prepare an annual depreciation schedule per asset and reconcile it to the ledger charge.
6. Record the capitalise-or-expense decision for every major repair in writing.
7. Review assets under construction before year-end closing and transfer anything ready for use.

Key takeaways

• Depreciation allocates cost; it is neither a valuation nor a replacement fund.
• Build the cost base correctly — separate land, and separate components with different lives.
• Take rates from the current issued schedule and disclose any difference from your own estimate.
• Depreciation on a revaluation surplus is not deductible; keep the two bases apart from the start.
• A fixed asset register that reconciles to the ledger is the strongest defence you have.