According to Article 6 paragraph (1) of Income Tax Law, depreciation is one kind of expense that can be deducted from gross income. This provision stipulates that expenses that have a useful life of more than 1 (one) year are charged through depreciation or amortization.

Depreciation expenses are expenses incurred for purchasing, establishing, adding, repairing, or changing tangible assets (fixed assets). Assets referred to are assets with more than 1 (one) year useful life that taxpayers own and use to obtain, collect and maintain income.

However, not all tangible assets could be depreciated. Tangible assets in the form of land with ownership rights (Hak Milik or HM), building use rights (Hak Guna Bangunan or HGB), business use rights (Hak Guna Usaha or HGU), and usage rights (Hak Pakai or HP) could not be depreciated. On the other hand, land that is used in a company or owned to generate income provided that land value will decrease due to its use to generate income can be depreciated, such as land used for a tile company, a ceramics company, or a brick company.

Fiscal depreciation is calculated using Article 11 of Income Tax Law guidelines. Asset depreciation method used must be carried out consistently. In these provisions, there are two methods for calculating depreciation, namely:

1. Straight line method, and
2. Double declining balance method.

Double declining balance method only used to calculate non-building assets depreciation expense, so that depreciation of building assets can only use straight line method.

The calculation of depreciation begins in the month expenditure is made for purchase, establishment, addition, repair or change of assets. As for work in process assets, depreciation begins in the month when assets are completed. Therefore, depreciation for new buildings completed in March 2022 will begin in March 2022.

Furthermore, in certain cases, depreciation can begin in the month when property is used to obtain, collect and maintain income or in the month in which property begins to produce. This provision applies to tangible assets that have never been used or produced by obtaining prior approval from Director General of Taxes (DGT).

Fiscal Depreciation Expense Calculation

Under tax provisions, depreciation expense is calculated using rate that are set according to tangible assets group and their useful life. In this regard, tangible assets are divided into two groups, namely buildings and non-buildings. The respective useful lives and rates for tangible assets group are as follows:

Tangible Assets Group	Useful Life	Straight Line Depreciation Method Rate	Double Declining Balance Depreciation Method Rate
I. Non-building 1. Group 1 2. Group 2 3. Group 3 4. Group 4	4 years 8 years 16 years 20 years	25% 12.5% 6.25% 5%	50% 25% 12.5% 10%
II. Building 1. Permanent 2. Not permanent	20 years 10 years	5% 10%	- -

Straight line tariff is calculated by dividing 1 by useful life and double declining balance tariff is calculated by multiplied straight line tariff by 2.

Details of tangible assets group are regulated in Appendix of Minister of Finance Regulation Number 96/PMK.03/2009. Some of them are :

• Group 1: wooden furniture (tables, chairs, cupboards), office machines (computers, printers, photocopy machine), motorcycles, etc.
• Group 2: metal furniture and equipment (tables, chairs, cabinets), air conditioners, fans, cars, etc.
• Group 3: mining machinery, textile processing machinery, wood processing machinery, aircraft, etc.
• Group 4: heavy construction machines, steam locomotives, etc.

Calculation example:

1. Straight Line Method

A building has an acquisition cost of IDR 1,000,000,000.00 (one billion rupiah) and a useful life of 20 (twenty) years. Therefore, depreciation expense is calculated as follows:

• The building is a group of permanent buildings, so building useful life fiscally is 20 years.
• Depreciation expense = 5% x IDR 1,000,000,000 = IDR 50,000,000.00

The amount of building depreciation expense is same for each year.

2. Declining Balance Method

An office machine was purchased and placed in January 2019 for IDR 150,000,000.00 (one hundred and fifty million rupiah). Office machine useful life according to accounting is 5 (five) years. Therefore, tax depreciation expense is calculated as follows:

• In accordance with Minister of Finance Regulation Number 96/PMK.03/2009, office machines are included in group 1, so its useful life is 4 years.
• Depreciation expense

Year	Rates	Depreciation Expense	Acquisition Cost	Remaining Book Value
2019	50%	75,000,000	150,000,000	75,000,000
2020	50%	37,500,000		37,500,000
2021	50%	18,750,000		18,750,000
2022	***	18,750,000		0

*** 2022 is the fourth (last) year so that taxpayers make depreciation all at once.

New Rules for Buildings Depreciation After the Ratification of Harmonization of Tax Regulation Law

Government regulates additional provisions related to depreciation in Harmonization of Tax Regulations Law. Through the latest provisions, Article 11 paragraph (6a) of Income Tax Law, taxpayers are given a choice in determining permanent building useful life in calculating depreciation, whether using 20 years or actual useful life according to taxpayer's accounting books.

Freedom to choose this useful life must be carried out consistently every year. However, considering that some taxpayers have depreciated permanent buildings with useful life of 20 years, Government gives opportunity to change the useful life to be in accordance with taxpayer’s accounting books, provided that:

1. Permanent building owned and used before 2022 tax year, and
2. Taxpayers submit notifications to DGT no later than the end of 2022 tax year.

Considering that Income Tax implementing regulations, that is Government Regulation Number 55 of 2022, were only ratified at the end of 2022, this change of useful life provisions will be more likely to be implemented by taxpayers whose tax year does not start from January to December.

Example:

In January 2017, taxpayer purchased a factory building for IDR 1,000,000,000.00 (one billion rupiah). Depreciation of factory building begins in January 2017 Fiscal Year. Useful life of factory building based on taxpayer's books is 30 (thirty) years, while fiscally it is 20 (twenty) years. In December 2022, taxpayers submit requests to DGT to use useful life according to their books. Therefore, depreciation expense is calculated as follows:

1. Using 20 years useful life (January 2017 – December 2021, 5 years)

• Rate per year is 5%
• The amount of depreciation expense for 5 years = 5 x (5% x IDR 1,000,000,000) = IDR 250,000,000
• Residual Book Value In the Beginning of January 2022 = IDR 1,000,000,000 – IDR 250,000,000 = IDR 750,000,000

2. Using 25 years useful life (January 2022 onwards, 20 years remaining)

• Rate per year is 4% (1 divided by 25 years)

 

depreciation , income-tax