Almost every entrepreneur must buy objects which are required to conduct economic 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 anticipated 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 mark or industrial design. These elements are referred to as intangible assets (wnip) and as fixed assets they form the assets of entreprenur (should appear in the register of fixed assets and intangible assets either in the balance sheet of entrpepreneur if he keeps full accounts).
The value of these assets cannot be immediately included in the costs, with the exception of those ingredients, where the purchase price is PLN 3500 net without VAT (in case of active VAT payers) or less. If you are not an active VAT payer you do not have the right to deduct VAT on the purchase price will be calculated inclusive of VAT. The cost of purchasing them will be applied gradually over time and shall be equal to their consumption. These incremental costs of the purchase or manufacture of those assets is called the depreciation. Cumulative value of depreciation adjusting the initial value of fixed asset to 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 depreciation, which means that the cost of acquiring is a tax cost).
It is vital for objectives 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 to help apply them uniformly) to treat depreciation as tax deductible costs, hence reducing the corporate tax charge. This is so-called the tax depreciation.
The depreciation 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 over time tax deductible expenses associated with 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. It is known that almost all the fixed assets, sooner or later, are destroyed. This spread over time form of saving money allows for replacement of fixed asset damaged during use with a new asset. Even more favourable for entrepreneurs are provided for by law derogations from the system of cost allocation 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 it. 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 the years to come, and accelerated depreciation adds to these losses. Settlement of income tax losses is limited in time to 5 years.
There are several methods of depreciation of fixed assets:
- the straight line method,
- diminishing balance method,
- higher ratios method,
- an individual, where the rates are established individually,
- a single rate of 100 % allows the inclusion of depreciation into 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 allocated. E.g. the annual depreciation rate for metalworking machine is 14 %. Whereas, in relation to intangible and legal assets provided by law minimum depreciation period, which may not be less than: 12 months for the development costs incurred, 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 does not cause the Accounting Act, the 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 from the initial value of fixed assets and intangible and legal assets. The initial value shall be in particular: (the full catalogue is in the Personal Income Tax Act and the Corporate Tax Act)
- in the event of acquisition - acquisition price;
- in the case of internally generated - 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.
Most often new fixed assets are introduced whose purchase is documented by an invoice or an agreement. 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 of an asset or the intangible asset and legal to 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.