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ALLOWANCES FOR DEPRECIATION, AMORTIZATION AND OTHER VALUATION RESERVES

  1. Review the nature and source of all accounts and ascertain if they are being used to claim unallowable deductions.
  2. With regard to depreciation, determine the correctness of the amount of asset being depreciated. No depreciation is allowable on the appraisal increase of fixed assets. Any foreseeable salvage value is to be deducted from the cost of the asset in determining the basis of depreciation.
    1. No depreciation is allowable on a building until it is completed or on a machine until it is installed.
    2. Where land and building are acquired on lump-sum, the following formula should be used in computing the building cost for depreciation computation:

FMV or Zonal value of land

--------------------------------------X

FMV or Zonal value of land and building

Total acquisition cost = Cost of Land

Total acquisition cost

Of land and building                            P xxx

Less: Cost of land per

above computation                                xxx

Cost of building                                   P xxx

  1. Ascertain the taxpayer’s depreciation and amortization policies and consider the following:
    1. Whether the methods applied by the taxpayer are in compliance with the Tax Code and existing revenue regulations;
    2. Whether the depreciation rates used by the taxpayer are fair and reasonable; and
    3. Whether the taxpayer has applied the same method consistently from period to period.
  2. Check authorization from minutes of meetings, fixed asset reports, or other supporting documents on credits for allowance for obsolescence and/or asset write-offs.

 

Reference: RAMO 1-2000