Karachi, September 4, 2024 – The Federal Board of Revenue (FBR) has provided a comprehensive explanation on the deduction of depreciation against tax liability for the tax year 2024-25, a critical aspect for businesses managing their assets and tax obligations. This clarification, as per the updated Income Tax Ordinance, 2001, effective until June 30, 2024, outlines the intricacies of Section 22, which governs the depreciation deductions. Understanding Section 22 of the Income Tax Ordinance Section 22 of the Income Tax Ordinance delineates the conditions and methodology for claiming depreciation on depreciable assets. These assets, which are used in a taxpayer’s business during the tax year, are eligible for depreciation deductions, helping to reduce the taxable income. 1. Eligibility and Calculation of Depreciation: According to the FBR, depreciation is allowed on assets that are used in a business during the tax year. The depreciation deduction is calculated by applying the specified rate from Part I of the Third Schedule to the written down value (WDV) of the asset at the beginning of the year. This WDV is adjusted based on the asset’s cost and previous depreciation deductions. 2. Partial Business Use: If an asset is used partially for business and partially for other purposes, the depreciation deduction is limited to the portion attributable to business use. This ensures that only the business-related depreciation impacts the taxable income. 3. Written Down Value Adjustments: The WDV of an asset at the beginning of the tax year is crucial. For newly acquired assets, the WDV is the cost reduced by any initial allowance under Section 23. For older assets, it’s the cost reduced by all prior depreciation deductions. This calculation maintains the accuracy of asset valuation over time. Special Considerations and Provisions 1. Assets Used in Exempt Businesses: Depreciation is considered to have been allowed even if the business was exempt from tax in previous years. Post-exemption, the WDV is recalculated by reducing the total depreciation, ensuring consistency in the asset’s valuation. 2. Disposition of Assets: When a depreciable asset…