Deductible or not: Depreciation expense on vehicles used in trade or business

An individual or corporation engaged in trade or business invests not only in the conduct of business itself but in the properties used or to be used in such trade or business.  It may be in the form of a building, where the business may be conducted; machines and equipments utilized in the business and vehicles used as transportation in the trade or business; or those given to officers and employees for work efficiency. Through the lapse of time, properties used in trade or business depreciate.  In light of this depreciation, the law allows a taxpayer engaged in trade or business to deduct the depreciation expense to properties used in trade or business. 

The taxpayer is not left without getting his investment to such property.  By allowing depreciation expense to be deducted, the taxpayer gets to see that the original value of the investment remains as it is from the beginning.  A taxpayer engaged in trade or business may avail of the deduction provided he complies with the conditions and rules on deductibility of depreciation. The law provides for conditions on deductibility and the Bureau of Internal Revenue (BIR) has issued a Revenue Regulation (RR) 12-2012 to implement the regulation pertaining to the deductibility of depreciation expense particularly vehicles used in trade or business.

The conditions on deductibility are: first, reasonableness of the allowance for depreciation; second, it must arise out of its use in trade or business; and third it must be charged off during the taxable year from the taxpayer’s books of account.  To implement this, RR 12-2012 provides for specific rules before a taxpayer may deduct depreciation expenses on account of vehicles, or in claiming other expenses and input taxes on account of said vehicle.

RR 12-2012 provides further that only one vehicle for land transport is allowed for the use of an official or employee, the value of which should not exceed two million four hundred thousand pesos (P2,400,000).  No depreciation shall be allowed for yachts, helicopters, airplanes and/or aircrafts, and land vehicles which exceed the above threshold amount, unless the taxpayer’s main line of business is transport operations or lease of transportation equipment and the vehicles purchased are used in said operations.  Hence, deduction as depreciation expense of a vehicle amounting to more that P2,400,000 will not be allowed in its entirety.

Moreover, the property must be used in trade or business.  No depreciation allowance may be deducted if such is utilized for personal use. In order to prove that the vehicle is ordinary and necessary, no deduction from gross income for depreciation shall be allowed unless the taxpayer substantiates the purchase with sufficient evidence, such as official receipts or other adequate records which contain: specific motor vehicle identification number, chassis number, or other registrable identification numbers of the vehicle; the total price of the specific vehicle subject to depreciation; and the direct connection or relation of the vehicle to the development, management, operation, and/or conduct of the trade or business or profession of the taxpayer. 

As additional guidelines, the regulation provides that all maintenance expenses on account of non-depreciable vehicles for taxation purposes are disallowed in its entirety.  The input taxes on the purchase of non-depreciable vehicles and all input taxes on maintenance expenses incurred thereon are likewise disallowed for taxation purposes.

All these rules must be complied in order to allow deduction of depreciation expense.  Without observance of these rules, a taxpayer engaged in trade or business may not be allowed to deduct depreciation expense and will not be entitled to keep his investment in the property.  Considering the enthusiasm of the Bureau in the collection of taxes and the strict construction of tax laws, updating taxpayers is a good start.

Jamie Andrea Mae Arlos is a supervisor from the tax group of Manabat Sanagustin & Co. (MS&Co.), the Philippine member firm of KPMG International. 

This article is for general information purposes only and should not be considered as professional advice to a specific issue. The views and opinions expressed herein are those of the author and do not necessarily represent the views and opinions of KPMG International or MS&Co. For comments or inquiries, please email [email protected] or [email protected].