The pro-rata depreciation procedure, which has been applied only to passenger cars from 1.1.1994, involves depreciation allocation for economic values subject to depreciation in the first account period they are acquired, from the acquisition date to the end of the period, as specified on the amendment to Tax Procedure Law Art. 320.
The calculation formula is given below.
Pro-rata Depreciation = Yearly Depreciation x Number of Remaining Months / 12
The acquisition month will be included in full.
The balance for which the appreciation is not allocated will be added to the depreciation amount to be allocated within the last year.
Pro-rata depreciation for other economic values other than passenger cars is avoided starting from 1.1.1994 with the Law No. 4108. Necessary arrangements are described in General Communique No. 241 of the TPL. The current version of the law article predicts pro-rata depreciation only for passenger cars.
- Passenger Car Definition*
The passenger car concept should be defined first in order to understand the law. The passenger car concept is not defined anywhere.
The definition of cars is provided in Motor Vehicles Tax (MVT) and Highway Code (HC) texts.
MVT defines cars as "motor vehicles designed to carry 7 sitting passengers including the driver, built and used to carry passengers and having 3 or 4 wheels in contact with the ground", adding the wagon, ranch and similar vehicles to the class with a parenthesis. The vehicles added in parenthesis are included since it is possible for them to be used as cars, even if they are not designed to carry passengers only.
The HC also defined cars as motor vehicles with a maximum of seven seats excluding the driver and designed to carry passengers.
The passenger car concept is also included in paragraphs five and seven of the Art. 40 of the ITL; and half of the expenses and depreciation of passenger cars –except for those used in transportation- are accepted as deductions. The passenger car concept is not defined in the ITL General Communiqué No. 180.
Therefore, we believe that the passenger car concept should be defined and understood as specified in MVT, which is a tax law, including the station wagon, ranch-wagon and similar vehicles specified in parenthesis. The panel vehicles and minibuses separately defined in MVT are not included in this definition.
- Application Scope*
The pro-rata depreciation application for the acquisition year of economic values predicted by Law No. 4008 was applied for one year, and then the scope was narrowed with the Law No. 4108, accepting retrospective depreciation adjustments for economic values excluded from the scope.
The law article limits assets subject to pro-rata depreciation with passenger cars only, also excluding passenger cards used by companies engaged in car rental or in any other similar activities.
According to this, full depreciation will be allocated for any economic asset in the year of acquisition, except for passenger cars. In addition, passenger cars will be subject to full depreciation if;
- Passenger Car Definition*
- The company's activities include car rental or any other similar activity, and
Vehicles are basically used for this purpose.
For example, a car rental company will allocate full depreciation for rental cars in the year of acquisition, while allocating pro-rata depreciation for passenger cars purchased for the use of managers or employees.
According to the TPL General Communiqué No. 163, pro-rata depreciations are applied for EXCHANGE RATE DIFFERENCES and INVESTMENT LOAN INTERESTS that incur and applied to costs until the end of the period in which the fixed asset is acquired; however, full depreciation will be allocated in case of additional costs for the following years since discretion is in question for applying exchange rate differences and loan interests to costs and expenses. The acquisition date of the fixed asset will provide the basis in terms of pro-rata depreciation duration for exchange rate differences and loan interests that incur until the end of the period in which the asset is acquired. However, adding the exchange rate differences to the cost for the following years is not recommended because this item should not be revaluated. It can cause errors. Therefore, direct expense entry would be a better way.
Furthermore, revaluation of passenger cars which are subject to pro-rata depreciation causes two problems.
The amount to be allocated in the last year since the depreciation amount not allocated due to pro-rata depreciation will be revaluated, and
The processing method for the non-allocated depreciation if the declining balances method is used for depreciation allocation.
The communication no. 62545 dated 27.12.1996 of the Ministry of Finance Commission of Inland Revenue has provided a direction for this matter. The communication indicates that tax payers who use the declining balances method will use pro-rata depreciation for the first year for passenger cars, and that the depreciation for the second year will be calculated over the amount calculated by subtracting full depreciation from the cost amount.
* The Amount of the Depreciation to be Allocated in the Last Year Will Be the Pre-Revaluation or Post-Revaluation Amount of the Non-Allocated Depreciation?
There are no legal predictions or any statements from the Ministry of Finance on whether the revaluated value or the amount calculated in the year in which the non-revaluated depreciation is applied will be used for the non-allocated depreciation amount that is transferred to the last year of the depreciation period due to pro-rata depreciation.
We believe that considering the nature of both depreciation and revaluation concepts, this amount should be the revaluated amount. The logic of the depreciation is the usage of the whole cost of the economic asset within the depreciation period. This means that at the end of the last year the economic asset will be totally used and the active value will be zero. The aim of revaluation is to compensate the effects of inflation by increasing the non-allocated portion according to revaluation rate and to avoid depreciations to be allocated in excess of this amount. The net active values of assets subject to revaluation will also be zero at the end of this period.
Otherwise, the net active value of the asset at the end of the depreciation period will not be zero, with a net active value equal to the increasing amount of the depreciation amount not allocated due to the pro-rata depreciation in the first year will remain.
Since the total allocation of an economic asset is indicated with its net active value-reaching zero, an application that does not allow the net active value to reach zero in the last year of depreciation will mean the limitation of the total depreciation rights. Our laws do not include any provision that causes this result.
Therefore, the revaluated value of the pro-rata depreciation that is tracked with regulatory accounts should be included in calculations in the last year of depreciation.
Application Examples
Example
A passenger car is purchased on 10.10.1996 for internal use. The cost of the car is 3.000.000.000.-TL. 40% depreciation will be allocated for the car according to the declining balances method. According to this the calculations and records will be as follows.
Yearly Depreciation
(3.000.000.000 x 40% ) 1.200.000.000-
Quarterly Depreciation
(1.200.000.000 x 3/12=) 300.000.000-
Non-Allocated Depreciation Due to Pro-rata Depreciation
(1.200.000.000-300.000.000=) 900.000.000-
1996 Accounting Records
-------------------------------------------/------------------------------------------------------
254Vehicles 3.000.000.000
100 Safe Deposit 3.000.000.000
-----------------------------------------/--------------------------------------------------------
770General Management Expenses 300.000.000
950KKEG 150.000.000
257 Accumulated Depreciations 300.000.000
951 KKEG Provisions 150.000.000
---------------------------------------/----------------------------------------------------------
984 Pro-rata Dep. Application
Non-Allocated Dep. 900.000.000
985 Pro-rata Dep. Application
Non-Allocated Dep. Provision 900.000.000
--------------------------------------/--------------------------------------------------------------
Such application causes only the first and last year's depreciation amounts to change if the pro-rata depreciation is applied or not, and the years in between remain intact.
Non-allocated depreciation due to pro-rata depreciation tracked with 984-985 Regulatory accounts is recorded as expense by being added to the calculated depreciation in the last year (normally 5 years according to the 20% rate). If the car is sold before the end of the depreciation period, pro-rata depreciation tracked in regulatory accounts that are not recorded as expense is not processed, but the Regulatory Accounts are closed.
The Other Record Method
This application involves tax payers who allocate depreciation and perform revaluation according to the declining balances method allocating full depreciation for the first year, and tracking the pro-rata depreciation portion in Regulatory Accounts and posting to G/L at the end of the year as Expenses Not Allowed By Law, for ease of tracking in the electronic environment.
According to this, the G/L records and depreciation tracking for the same example above will be:
----------------------------------------------------/-----------------------------------------------------
254 Vehicles 3.000.000.000-
100Safe Deposit 3.000.000.000-
---------------------------------------------------/------------------------------------------------------
770General Management Expenses 1.200.000.000-
950 Expenses Not Allowed by Law 1.050.000.000-
(150.000.000 + 900.000.000=)
257Accumulated Depreciations 1.200.000.000-
951Expenses Not Allowed By Law Prov. 1.050.000.000-
(150.000.000+900.000.00)
-----------------------------------------------/----------------------------------------------------------
984Pro-rata Depr. App.
Non-Allocated Dep. 900.000.000-
985 Pro-rata Dep. App. Dep. Provision 900.000.000-
----------------------------------------------/-----------------------------------------------------------
Dep.
Base
Allocated Dep.
New Acc. Dep.
REV Net Act. Value
REV Last Net Act. Value
V.I. Fund
Non-Allocated Dep.3.000.000
300.000
300.000
900.000
2.700.000
1.080.000
1.530.000
2.700.000
4.050.000
1.350.000
1.350.000
2.430.000
972.000
3.267.000
2.970.000
4.455.000
1.485.000
2.025.000
2.187.000
874.800
5.775.300
3.483.000
5.224.500
1.741.500
3.037.500
6.524.550
6.524.550
15.187.500
4.349.700
6.524.550
2.174.850
4.556.250
The depreciation base for the 2nd year is the value calculated by deducting the non-allocated depreciation amount.
Revaluation is performed starting from 1997. The increase resulting from Revaluation (Revaluation rate 50%) is posted as below. (Full depreciation will be allocated in 1997).
------------------------------------------------------/--------------------------------------------------------
254Vehicles 1.500.000.000
984 Pro-rata Dep. Application
Non-Allocated Dep. 450.000.000
257Accumulated Depreciations 150.000.000
522Value Increase Fund 1.350.000.000
985Pro-rata Dep. App. Non-Allocated
Dep.Prov. 450.000.000
----------------------------------------------------/------------------------------------------------------------
As seen above, the pro-rata depreciation amount tracked in Regulatory Accounts is increased per revaluation rate at the end of the non-allocation period.
The yearly depreciation allocated for 1997 over revaluated value is as below.
---------------------------------------------------------/-----------------------------------------------------------
770General Management Expenses 1.080.000.000
950K.K.E.G.(1/2) 540.000.000
257Accumulated Dep. 1.080.000.000
951K.K.E.G (1/2) 540.000.000
-------------------------------------------------------/-------------------------------------------------------------
Since the declining balances method is used, the depreciation base and allocated depreciation for 1997 are calculated as below.
3.000.000.000- x 50% V. Inc. 1.500.000.000 - = 4.500.000.000.-
Allocated Accumulated Dep. Rev.
300.000.000.- x 50% 150.000.000.- = 450.000.000
Non-Allocated Dep. Revaluation
900.000.000- x 50% 45O.000.000 = 1.350.000.000.
----------------------
Total Accumulated Depreciation 1.800.000.000-
-----------------------
2.700.000.000-
2.700.000.000.- x 40% = 1.080.000.000-TL. (Depreciation for 1997)
Depreciations for 1998 and 1999 will be allocated with the same method.
The revaluated value of the asset in year 2000 is 15.187.500-TL. The new value of allocated accumulated depreciations is (5.775.300+2.887.600-) = 8.662.900-TL, which when subtracted from the active value gives (15.187.500 - 8.662.900 =) 6.524.550. TL as the value to be allocated.
This amount includes the new value of non-allocated accumulated depreciation: 4.556.250.-TL. (The base of the depreciation, which should be allocated for 100% in the last year is 1.968.300.-TL, which when added to 4.556.250.-TL –the new value of non-allocated depreciation, gives the depreciation to be allocated in year 2000: 6.524.550. TL.)
The revaluation and depreciation records of the last year are as below.
-------------------------------------------------------/-----------------------------------------
254Vehicles Account 5.062.500.000
984Pro-rata Depr. App.
Non-Allocated Dep. 1.518.750.000
257Accumulated Depreciations 2.887.650.000
522Value Increase Fund 2.174.850.000
985Pro-rata Dep. App. Non-Allocated
Dep.Prov. 1.518.750.000
----------------------------------------------------/--------------------------------------------
770General Management Expenses 6.524.550.000
950KKEG 3.262.275.000
257Accumulated Depreciations 6.524.550.000
951KKEG 3.262.275.000
-------------------------------------------------/-------------------------------------------------
985Pro-rata Depr. Non-App.
Dep.Prov. 4.556.250.000
984Pro-rata Depr. Non-App.Dep. 4.556.250.000
-----------------------------------------------/-----------------------------------------------------
DEPRECIATION TABLE WITHOUT REVALUATION ACCORDING TO DECLININING BALANCES METHOD (000.-TL)
Year
Cost Amount
Dep. Avg.
Acc. Dep.
Dep. Base
Current Year Dep.
New Acc. Dep.
All. Dep.
1996
3.000.000
0,40
3.000.000
300.000
300.000
900.000
1997
3.000.000
0,40
300.000
1.800.000
720.000
1.020.000
900.000
1998
3.000.000
0,40
1.020.000
1.080.000
432.000
1.452.000
900.000
1999
3.000.000
0,40
1.452.000
648.000
259.200
1.711.200
900.000
2000
3.000.000
%100
1.711.200
1.288.800
1.288.800
3.000.000
900.000
As seen above, the balance value in 2000, the last year of depreciation is (648.000-259.200 =) 388.800 (thousand TL); when the non-allocated depreciation tracked in regulatory account [900.000 (thousand TL) is added to this figure, the fixed asset paid out with (388.800+900.000=)1.288.800-TL of allocated depreciation. The provision (984-985) accounts tracked in Regulatory accounts during this period are closed as follows.
-----------------------------------------------------------/----------------------------------------------------------
985Pro-rata Depreciation Non-All. Dep. Prov. 900.000.000
984Pro-rata Depr. Non-App.Dep. 900.000.000
----------------------------------------------------------/-----------------------------------------------------------
If revaluation is applied in 1997 for the same example, the following tables will be obtained. (The revaluation rate is accepted as 50% for each year for ease of calculation. The reiterated article no. 298 of the TPL states that revaluation is not performed in the acquisition year.)
DEPRECIATION TABLE WITH PRO-RATA DEPRECIATION AND REVALUATION ACCORDING TO DECLININING BALANCES METHOD (000.-TL)Year
Value Before Rev.
Rev. Rate
Dep. Rate
F. Asset Value Increase
New Value
Acc. Dep.
Dep. Value Increase
1996
3.000.000
0,50
0,40
3.00.000
1997
3.000.000
0,50
0,40
1.500.000
4.500.000
300.000
150.000
1998
4.500.000
0,50
0,40
2.250.000
6.750.000
1.530.000
765.000
1999
6.750.000
0.50
0,40
3.375.000
1.125.000
3.267.000
1.633.500
2000
10.125.000
0.50
%100
5.062.500
15.187.500
5.775.300
2.887.650
Accounts 984-985 are closed in the last year of depreciation, and the related adjustment is made by declaring the amount tracked in these accounts on the other discounts line of the declaration. No other depreciation record is made (since the calculations are performed with full depreciation for the first year).
As a result of this, the adjustment on the pro-rata depreciation application is only the postponement of a portion of depreciation expenses.
Pro-rata Depreciation Situations Other Than Passenger Cars
- Revaluation on the date of death of the business owner
- End of obligation due to liquidation, merger, transfer or transition
- Change of partners in ordinary partnerships
- Changes in account periods
- Foreign based tax payers transferring assets subject to depreciation to abroad