Depreciation costs play a significant role in calculating the necessary expenses for businesses in Korea. Understanding the methods of calculating depreciation and the factors involved is crucial for accurate reporting and complying with tax laws.
Methods of Calculating Depreciation
Depreciation of fixed assets is determined using the following methods:
1. Original Cost of Fixed Assets
- For purchased fixed assets, the original cost includes the purchase price, acquisition tax, registration tax, and other incidental costs.
- For self-constructed fixed assets, the original cost comprises raw materials cost, labor costs, freight expenses, loading and unloading costs, insurance premiums, fees, public dues (including registration tax and acquisition tax), installation expenses, and other incidental costs.
- For fixed assets acquired through other means, the original cost is the sum of the market value at the time of acquisition, registration tax, acquisition tax, and other incidental costs.
2. Service Life
- Tax laws prescribe the standard service life and the scope of service life based on asset structure, type of asset, and type of business. Business operators must determine and report the service life within the scope prescribed by law.
3. Residual Value
- The residual value of depreciable assets is zero. However, when using the fixed percentage method, the depreciation rate is calculated using 5% of the original cost as the residual value. The undepreciated balance (i.e., 5% of the original cost) is added to the allowable limit of depreciation in the year when the undepreciated balance becomes 5% or less of the original cost.
4. Calculation of the Allowable Limit for Depreciation
- Straight-line method: Original cost × Depreciation rate
- Fixed percentage method: (Original cost ‒ Accumulated depreciation) × Depreciation rate
- Units of production method: Original cost × Amount of mining in the taxable year ÷ Expected total amount of mining or Original cost × (Amount of reclaiming in the taxable year ÷ Expected total amount of reclaiming)
Immediate Depreciation of Fiction
When the original cost or capital expenditure of fixed assets is appropriated as necessary expense, the appropriated necessary expenses of the taxable year are considered as depreciation costs when calculating the amount of allowance or disallowance.
Revenue Expenditures and Capital Expenditures
1. Revenue Expenditures
Revenue expenditures are repair expenses incurred by a business operator to restore or recover their assets' functionality or maintain their efficiency.
2. Capital Expenditures
Capital expenditures are repair expenses spent by a business operator to extend the service life of depreciable assets or increase their value.
Conclusion
Understanding the methods of calculating depreciation and the treatment of depreciation costs as necessary expenses is crucial for businesses in Korea to comply with income tax regulations. Accurate reporting ensures smooth operations and reduces the risk of penalties during tax assessments.