In business activity almost every entrepreneur has to purchase objects that are necessary to conduct business activity. He must provide the necessary equipment for premises (office furniture, computer, printer, machinery and equipment needed to run the business and sometimes means of transport (a car). These objects, if only their expected period of use by the entrepreneur for the purposes of economic activity exceeds one year, are referred to as fixed assets.
Sometimes entrepreneur for business purposes must buy the right to use a licence to use the software, the right to use or exploit the trade mark or industrial design. These objects are referred to as intangible and legal assets and similarly as fixed assets they form the assets of entreprenur (should appear in the register of fixed assets and intangible assets or in the balance sheet of entrepepreneur if he keeps full accounts).
The purchase value of these assets cannot be immediately included in the costs, with the exception of those components whose purchase price is PLN 3500 net without VAT (in case of active VAT payers) or less. (NOTE! From 2018 onwards, the limit of intangible assets enabling one-off recognition of expenses for the purchase of such assets or values as tax deductible costs will be increased from the current PLN 3,500 to PLN 10,000. The new limit will apply to assets accepted for use after 31 December 2017). If you are not an active VAT payer you do not have the right to deduct VAT, the purchase price will be calculated inclusive of VAT. The cost of their purchase will be applied gradually over time and shall be equal to their consumption. The gradual deduction of costs of the purchase or production of those assets is called depreciation. The accumulated value of depreciation adjusting the initial value of fixed asset to the value which takes into account depreciation charges is called the redemption of fixed asset.
There are four major groups of fixed assets:
- real estate;
- machinery, equipment, means of transport and other goods;
- improvements in third party assets,
- livestock (note: it is not subject to tax depreciation, which means that the cost of acquiring is a tax deductible).
It is vital for purposes and principles regarding depreciation of the fixed asset or an intangible asset and legal, that the period of use by the entrepreneur for business purposes amounted to over one year and its value was higher than PLN 3500 .
- If you want to see the details related to depreciation, have a look at the guide Depreciation of fixed assets in a company
Tax and accounting depreciation
As regards the costs of the purchased and manufactured components in the case of entrepreneurs keeping accounts in accordance with the rules of the Accounting Act is reflected in the entity's balance sheet and is known as the accounting depreciation.
Provisions allow (but not necessarily in the same way, although often in practice they are applied uniformly) to treat depreciation as tax deductible costs, thus reducing the income tax. This is so-called the tax depreciation.
The provisions governing the issue of depreciation can be found in Personal Income Tax Act, the Corporate Income Tax Act and the Accounting Act. At the same time, fixed assets are classified in the Regulation of Council of Ministers.
Tax depreciation is a form of settlement iover time tax deductible expenses related to the acquisition of a fixed asset or intangible and legal asset. It is therefore distributed over time method to reduce income tax burden and save money. As we know, practically all the fixed assets, sooner or later, are destroyed. This spread over time form of saving money allows to replace fixed asset damaged during use with a new asset. Even more favourable for entrepreneurs are provided for by law derogations from the system of settling cost over time in favour of a shorter in time depreciation of assets (e.g. one-off depreciation, higher depreciation rates).
Types of depreciation
Entrepreneurs have the choice between different tax depreciation methods. Depreciation may be monthly, quarterly or annual- at the end of the year. It is best to choose a method before the acquisition of fixed asset and no later than on the day you start to use it as on this day it needs to be clarified.
Not always less deferred depreciation must be the most favourable tax treatment. This is the case e.g. if the entrepreneur incurs losses from economic activity in subsequent years, and faster depreciation increases these losses. Settlement of loss in income tax is limited in to 5 years.
There are several methods of depreciation of fixed assets:
- straight line method,
- declining balance method,
- higher ratios method,
- individual, where rates are established individually,
- a single rate of 100 % allows for one-off inclusion of depreciation write-offs in tax costs.
Classification of fixed assets
You can make the tax depreciation over period of time and the according to rates specified by the regulations. Assets subject to depreciation are divided into specific groups of classification of fixed assets marked by the relevant symbols (Classification of fixed assets -KŚT) to which the annual depreciation rates are assigned. E.g. the annual depreciation rate for metalworking machine is 14 %. Whereas, in relation to intangible and legal assets it is characteristic that the regulations specify a minimum depreciation period, which may not be less than: 12 months for incurred costs of completed development works, 24 months (for computer programs (sub-licence) and copyright licenses; for licenses for screening of films and the broadcasting of radio and television programmes), 60 months (other intangible and legal assets). This means that expenditure on purchased computer software license you can include in costs in not less than 24 months (annual rate is 50 %).
Such restriction are not provided for in the Accounting Act, where depreciation period is determined only according to the expected period of economic useful life of assets.
Important: Fixed assets of a value not exceeding PLN 3500 net can be classified as tax deductible costs.
When to start charging depreciation?
Depreciation charges are made as from the first month following the month in which they were introduced to records, by the end of the month in which: the sum of depreciation charges equals their initial value, they were put to liquidation, disposed of, deficit was determined.
If one uses a one-off depreciation, it may be made in the month in which the fixed asset was entered into the records.
From what value can the depreciation be charged?
Depreciation is charged on the initial value of fixed assets and intangible and legal assets. The following are considered to be the initial value: (the full catalogue is in the Personal Income Tax Act and the Corporate Tax Act)
- in the event of paid acquisition - the purchase price;
- if produced internally - cost of manufacture;
- if acquired by inheritance, gift or other free of charge manner - the market value as of the day of acquisition, unless the gift agreement or agreement of free transfer determines this value at a lower level;
- in the event of acquisition by means of non-cash contribution contributed to a company which is not a legal entity
initial value from which the depreciation was made - if the contribution had been depreciated,
expenditure on the purchase or construction of a contribution, not classified as tax deductible costs in any form - if the contribution had not been depreciated,
value determined in accordance with Article 19, where the determination of the expenditure on the acquisition or production of contribution by a shareholder contributing as a natural person, is impossible and contribution has not been used in the economic activity, excluding intangible assets produced by a member on his own.
New fixed assets are most often introduced, the purchase of which is documented by invoice or contract. Then the initial value of fixed asset will be the price resulting from the purchase document, which may be increased by the costs associated with the purchase calculated until the date of transferring the fixed asset or intangible asset for use. In particular, they are transport costs, insurance, loading and unloading, assembly, installation and launch of programmes and computer systems, notary fees, tax fees, interests and commission. In the case of imports, the purchase price covers customs duties and excise duties on imports of assets.
The rules governing depreciation can be found in Personal Income Tax Act, the Corporate Income Tax Act and the Accounting Act. At the same time, fixed assets are classified by Regulation of Council of Ministers.
One-off depreciation - new facilitations
New provisions on one-off depreciation came into force in August 2017. Thanks to them, entrepreneurs will be able to make one-off depreciation write-offs in the amount of up to PLN 100,000 yearly.
- Taxpayers conducting business activity may make one-off depreciation deductions from the initial value of new acquired fixed assets included in groups 3-6 and 8 of the Fixed Assets Classification, i. e. machinery and equipment (apart from the possibility of such deductions are real estate and means of transport).
- The amount of write-offs may not exceed PLN 100,000 in a tax year and the value of investment in fixed assets should be at least PLN 10,000. The provisions allow inclusion in the limit of EUR 10,000 the value of each of these assets, while the value of each of these assets must be higher than PLN 3,500.
- The amended regulations allow to include directly into the tax deductible costs (up to PLN 100,000) the payments (advances) made in respect of the acquisition of fixed assets (from groups 3-6 and 8 of the Fixed Assets Classification, with the value of at least PLN 10,000). The delivery of the goods shall be carried out in the following settlement periods.
- Limit of PLN 100,000 includes both payments on the purchase of fixed assets (advances) and depreciation write-offs on acquired fixed assets (advance payment will be taken into account by reducing the amount of one-off depreciation write-offs). In the case of a company which is not a legal person, the limit of PLN 100,000 applies jointly to all partners of the company.
Currently, the law provides for the possibility of small taxpayers (up to EUR 1.2 million of annual revenue) and taxpayers starting their activity to benefit from one-off depreciation of up to EUR 50,000. These write-offs may be made from fixed assets classified in classes 3-8 of the Fixed Assets Classification, excluding passenger cars. The write-offs are made in the tax year in which the assets were entered into the fixed assets and intangible assets records, up to the amount not exceeding in one year the equivalent of EUR 50,000 the cumulative value of these depreciation charges.
Taxpayers may not make one-off depreciation write-offs earlier than in the month in which fixed assets were entered in the fixed assets records. On the other hand, the entry in the records should take place not later than in the month in which such fixed assets were transferred for use.
This, however, requires, unlike the planned solution, applying for de minimis aid, which in practice means that additional forms must be filled in and it is subject to limits in terms of value (EUR 200 000 within three years). The use of the ceiling for de minimis aid may, for example, prevent entrepreneurs from using the EU funds distributed under this formula.
All entrepreneurs can benefit from the new regulation. The new regulations also provide for the possibility of including in the tax deductible costs payments for the purchase of fixed assets, which will be delivered in subsequent years. The current one-off depreciation method does not allow this, which constitutes an investment barrier for the smallest entrepreneurs.
Following the amendments, there will be two possibilities of one-time depreciation: in the case of purchase of a fixed asset entitling to use a one-time depreciation write-off in the amount of EUR 50,000 and PLN 100,000 respectively (new solution), the write-off against this fixed asset may be made only on the basis of one of these solutions.