By adopting the new shortened depreciation method, companies in certain industries can ease the financial burden of asset acquisition. Saving proportionally more corporate income tax in the first years after the acquisition, makes investing in new equipment more attractive.
The State Administration of Taxation has released a tax update that concerns accelerated depreciation of fixed assets. The new policy is relevant for enterprises in the following six major industries:
Enterprises whose primary business lies within these fields and whose income from primary business, in the year, in which the fixed assets are put into operation, accounts for more than 50% of the enterprise’s total income, are applicable for accelerated depreciation.
Investors should take note of the tax implication
Fixed assets purchased after 01 January 2014 by enterprises of the six industries, may be deducted using a shortened depreciation life. Notably, the shortened depreciation period should not be shorter than 60% of the regular depreciation period, as prescribed by the law on Enterprise Income Tax.
Alternatively, companies may choose to adopt an accelerated depreciation method, namely a double-declining balance or the sum of the years’ digits method. It should be noted that once one deprecation method has been adopted, it should not be changed.
- R&D-specific instruments and equipment acquired by enterprises after January 1, 2014, with a unit value of less than ¥1 million, may be deducted for corporate income tax (CIT) purposes on a one-off basis in the year of acquisition.
- In small companies* this does also apply for manufacturing equipment with a unit value of no more than ¥1 million. They, too, may be deducted for CIT purposes on a one-off basis in the year of acquisition.
- Acquired equipment that does not fall under these two stipulations can be deducted using shortened or accelerated depreciation.
Generally – Revenue under ¥300k, up to 80 employees, total assets under ¥10 million.
In manufacturing – Revenue under ¥300k, up to 100 employees, total assets under ¥30 million.
A small case study is set up illustrate the different depreciation methods and their tax implications.
Company A purchases a machine in December 2014. The original value of the machine is ¥6 million and it has a useful life of 5 years. The residual value of the machine is 4%.
Instead of using the regular straight line method Company A can choose a shortened depreciation life or opt for accelerated depreciation using a double-declining balance or the sum of the years’ digits method. While, in the end, all of these methods have the same total depreciation expenses, the expenses are allocated differently over the five year period.
Each of the methods is illustrated below:
1. Straight Line Method
Under the regular straight line method, the depreciation expense is calculated like this:
The annual depreciation expense is ¥1,152,000 for 5 years. The CIT saved this way is 25% of the depreciation expense:
2. Shortened Depreciation Life Method
Since Company A operates in the Biopharmaceutical sector, it would be subject to the policy of Accelerated Depreciation.
Company A shortens the depreciation period to 4 years (with regard to the policy that depreciation should not be shortened to less than 60% of the regular depreciation period). Then the depreciation would be:
The annual depreciation expense is ¥1,440,000 for 4 years. The CIT saved this way is 25% of the depreciation expense:
3. Double-Declining Method
Using the double-declining method, Company A starts depreciating the machine on January 2015, and the depreciation expense is calculated as follows:
Then each year the depreciation expense would be:
4. Sum of the Years’ Digits Method
In the sum of the years’ digits method you add up the years:
Then the annual depreciation is calculated as follows:
This graphic representation highlights the differences of the four methods.
Whichever of the 4 methods is used, the total depreciation expense over the 5-year period is ¥5,760,000, equivalent to ¥1,440,000. Only the length of the allocation period and the amount allocated each year is different.
You can see that in 2015, Company A can deduct the highest depreciation expense (¥2,400,000) by adopting the double-declining method, saving the highest amount of income taxes (¥600,000). Company A would pay ¥312,000 less CIT by choosing the double-declining method over the straight line method:
Company A can adopt a method of shortened or accelerated depreciation to save more income tax in the first years after the acquisition of assets to ease financial pressure. This way, the company would have more motivation to increase investment in fixed assets which promotes technological progress and growth in the target industries.
Get more information on the depreciation of fixed assets – call our office now at +86 10 6561 6609 – 811
Grace Shi is a partner at ECOVIS Beijing China. She has over 12 years of experience in accounting, auditing, and tax advisory services in both international accounting firms and large Chinese corporations. She has an international MBA and a US Global Finance Master’s degree. Since 2001, she is a Chinese Certified Public Accountant (CPA) and, since 2002, a Chinese Certified Taxation Agent (CTA). Mrs. Shi is one of the founders of ECOVIS R&G Consulting Ltd. (Beijing). She has perfect skills in written and spoken English and Chinese. For more information, please contact: email@example.com
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