Depreciation Expense Deduction Under NIRC Section 34(F): How to Compute It for BIR Income Tax

Depreciation is a reasonable allowance for the exhaustion, wear and tear of property used in a trade or business, deductible under NIRC Section 34(F) — it lets a business recover an asset’s cost over the years the asset is actually used, instead of expensing the full purchase price in one year. For itemized-deduction filers, the most common computation is the straight-line method: acquisition cost minus estimated salvage value, divided by the asset’s useful life in years, claimed as an annual expense against gross income.

This guide walks through what counts as depreciable property, the straight-line formula and how useful life and salvage value feed into it, why depreciation disappears entirely under OSD or the 8% income tax option, and a worked example depreciating a delivery van. For the broader choice this deduction sits inside, see Optional Standard Deduction (OSD) vs. Itemized Deductions: Which Should You Choose? and What Makes a Business Expense “Ordinary and Necessary”? BIR Rules Under RMC No. 81-2025.

What is depreciation, and what property qualifies? #

Depreciation under NIRC Section 34(F) is a deduction for the gradual loss of value in property used in the trade, business, or profession — not a deduction for property held for personal use or as pure investment. The provision covers exhaustion, wear and tear from ordinary operation, and obsolescence, where an asset becomes outdated or unsuitable before it physically wears out. The text of the provision itself reads:

“There shall be allowed as a depreciation deduction a reasonable allowance for the exhaustion, wear and tear (including reasonable allowance for obsolescence) of property used in the trade or business.”

Qualifying property is typically tangible and has a useful life longer than one year — delivery vehicles, office equipment, machinery, furniture and fixtures, and buildings used in operations. Land itself is never depreciable, because land does not wear out or become obsolete; only the improvements built on it (a building, a warehouse) qualify.

How is the straight-line depreciation formula computed? #

The straight-line method spreads an asset’s depreciable cost evenly across its useful life: annual depreciation equals acquisition cost minus estimated salvage value, divided by the number of years of useful life. It is the default and by far the most commonly applied method for Philippine income tax purposes, because it is simple to compute, easy to substantiate on audit, and produces a predictable, level expense each year.

The formula in full:

Annual Depreciation = (Acquisition Cost − Salvage Value) ÷ Useful Life (in years)

• Acquisition cost is what the business actually paid to buy and place the asset in service — the price paid, not a later appraised or reappraised value.
• Salvage value (also called residual value) is the estimated amount the asset could still be sold for once its useful life ends.
• Useful life is the number of years the business reasonably expects to use the asset in its operations before it is retired or replaced.

Under NIRC Section 34(F), other computation methods besides straight-line — including the declining-balance method (with the rate capped at twice the straight-line rate) and the sum-of-the-years-digits method — are also allowed. In practice, though, a business that has already been depreciating an asset under one method should not switch to another without first securing BIR approval, since a mid-stream change in method or useful life can itself be treated as a change requiring the Commissioner’s consent.

How do useful life and salvage value get set — and can the BIR dispute them? #

The NIRC does not publish a fixed table of useful lives for different asset types, so a business estimates useful life based on the nature of the property, how heavily it will be used, and common practice in its industry — a judgment call, not a lookup. Commonly used estimates include roughly five years for motor vehicles and roughly twenty years for buildings, though the actual figure should reflect the specific asset’s expected service life in that business, not a one-size-fits-all number.

NIRC Section 34(F) gives both the taxpayer and the Commissioner a way to lock in certainty on this estimate: where the two enter a written agreement specifically covering an asset’s useful life and depreciation rate, that agreed rate binds both sides going forward, unless facts not considered when the agreement was made later surface. Where a business has consistently claimed depreciation on a given useful life and rate without written objection from the Commissioner, that adopted useful life and rate is likewise treated as binding for that asset. Either way, a subsequent change in the agreed rate or useful life only takes effect from the year written notice of the change is served — it is not retroactive.

Salvage value works the same way: it is an estimate, made at the time the asset is placed in service, of what it could still be sold for once its useful life is over. A residual value of around 10% of acquisition cost is a commonly used rule of thumb when no better basis exists, though a business is free to use a different, better-supported figure — a low-value asset with essentially no resale market, for instance, is often depreciated to a salvage value at or near zero.

One acquisition-basis rule matters regardless of method: Revenue Memorandum Circular (RMC) No. 70-2010 clarified that depreciation of property, plant, and equipment must be computed on acquisition cost, not on a subsequently reappraised or fair-market value, and revoked two earlier BIR rulings that had allowed appraisal-based depreciation. A business that depreciates an asset off an appraised value instead of what it actually paid risks a deficiency assessment on the excess deduction claimed.

Why depreciation disappears under OSD or the 8% income tax option #

Depreciation is only available to a taxpayer computing taxable income under itemized deductions — it is not separately claimable by a business or professional that elects the Optional Standard Deduction (OSD) or the 8% income tax rate. Both alternatives replace the entire list of itemized business expenses, depreciation included, with a single flat computation:

• OSD, under NIRC Section 34(L), lets a taxpayer deduct a flat 40% of gross sales or receipts (individuals) or gross income (corporations) in lieu of itemizing actual expenses — depreciation is one of the specific costs folded into that flat 40%, not something added on top of it. See Optional Standard Deduction (OSD) vs. Itemized Deductions: Which Should You Choose? for how the OSD election works and when it beats itemizing.
• The 8% income tax option, available to qualifying self-employed individuals and professionals below the VAT threshold, taxes gross sales or receipts directly at a flat 8% in lieu of both the graduated income tax rates and percentage tax — there is no itemized-expense or OSD layer to apply depreciation against at all.

A business that owns depreciable property and expects that deduction to matter should model whether itemized deductions — including depreciation on its equipment, vehicles, and buildings — actually produce a lower tax bill than the flat alternatives before electing either one. Depreciation only ever reduces taxable income for a taxpayer that has chosen to itemize.

Worked example: depreciating a ₱600,000 delivery van #

A retail business buys a delivery van for ₱600,000, cash, and places it in service on January 1. It estimates a five-year useful life and, because the van will be run into the ground on delivery routes with negligible resale value at the end of that period, assigns it no material salvage value. The straight-line computation is:

If the business itemizes its deductions, that ₱120,000 is claimed as a depreciation expense on its annual income tax return each year for five years, reducing taxable income by ₱120,000 annually alongside its other ordinary and necessary business expenses. By the end of year five, the van is fully depreciated — its full ₱600,000 cost has been recovered through the deduction, and no further depreciation expense is claimed unless the business later re-estimates useful life or adjusts the salvage value with supporting facts.

Compare that same business electing OSD instead: it would deduct a flat 40% of gross sales and could not separately add the ₱120,000 van depreciation on top — the depreciation is already presumed to be inside that 40% figure. Whether itemizing (with the van depreciation plus every other substantiated expense) or OSD produces the lower tax bill depends entirely on how much the business actually spends running its operations that year.

Frequently asked questions #

What is depreciation for BIR income tax purposes? #

Depreciation is a reasonable allowance for the exhaustion, wear and tear, and obsolescence of property used in a trade or business, deductible under NIRC Section 34(F). It lets a business spread the cost of a long-lived asset — like equipment or a vehicle — across the years it is actually used to earn income, rather than deducting the full cost in the year of purchase.

What depreciation method does the BIR require? #

The straight-line method is the default and most commonly used method: annual depreciation equals cost minus salvage value, divided by the asset’s useful life in years. Other methods, such as declining-balance (capped at twice the straight-line rate) or sum-of-the-years-digits, are allowed under NIRC Section 34(F), but a business already using a method should not switch it without BIR approval.

How is useful life determined, and can the BIR question it? #

The NIRC does not prescribe fixed useful-life tables, so a taxpayer estimates useful life based on the nature of the asset, industry norms, and expected use — commonly around five years for vehicles and twenty years for buildings. If the taxpayer and the Commissioner enter a written agreement on useful life and depreciation rate, that rate binds both parties going forward unless facts not considered at the time later come to light.

What is salvage value and how does it affect the depreciation computation? #

Salvage value (also called residual value) is the estimated amount the asset could be sold for at the end of its useful life. It is subtracted from acquisition cost before dividing by useful life, since a business should not depreciate more than the value it actually expects to lose. A residual value of around 10% of cost is a common estimate when no better figure is available, though a business is not required to use that specific percentage.

Can a business claim depreciation if it elects OSD or the 8% income tax rate? #

No. Depreciation is an itemized deduction, and both the Optional Standard Deduction and the 8% income tax option replace itemized deductions with a single flat computation. A business or professional that elects OSD or the 8% rate cannot separately claim depreciation, or any other itemized expense, on top of that flat deduction.

Can depreciation be based on an asset’s appraised value instead of its acquisition cost? #

No. Revenue Memorandum Circular No. 70-2010 clarifies that depreciation must be computed on the asset’s acquisition cost, not on a later reappraised or fair-market value, and revoked earlier BIR rulings that had allowed appraisal-based depreciation. Any deficiency from using appraised value as the depreciation base is subject to assessment.

Summary #

Depreciation under NIRC Section 34(F) lets an itemized-deduction filer recover the cost of business property over its useful life, most commonly through the straight-line formula — acquisition cost minus salvage value, divided by useful life in years — with useful life and salvage value set by reasonable estimate and, once relied on consistently or agreed with the Commissioner in writing, binding going forward. The deduction is computed on acquisition cost, not appraised value, per RMC No. 70-2010, and it is unavailable entirely to a taxpayer that elects OSD or the 8% income tax option, since both replace itemized expenses with a flat computation. For the substantive test every itemized expense (depreciation included) must also pass, see What Makes a Business Expense “Ordinary and Necessary”? BIR Rules Under RMC No. 81-2025.