Correction of the initial value of an asset - important information! part 2

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Assets used in the course of business activity are subject to wear, which can be included in the company's costs in the form of depreciation write-offs. In some situations, this consumption may be subject to correction as a result of an improvement of a fixed asset, but also as a result of a temporary or permanent loss of its basic functional features. What are the tax effects of adjusting the initial value of the asset? Answer in the article!

The depreciation write-off may not always be a company cost

Tax deductible costs pursuant to Art. 22 sec. 8 of the Personal Income Tax Act, there are write-offs for the consumption of fixed assets and intangible assets (depreciation write-offs) made only in accordance with Art. 22a-22o of the Act, with the exception of non-cost depreciation.
However, the expense related to the improvement of fixed assets will not be a tax deductible cost, if the sum of these expenses during the tax year does not exceed PLN 10,000.
The depreciation write-offs made on the initial value of passenger cars above PLN 150,000 will not be a tax deductible cost.
A depreciation write-off will not be a company cost, if the purchase of a fixed asset was financed with a subsidy. If, on the other hand, the purchase of an asset was financed partly from the subsidy and partly from the taxpayer's own funds, then the depreciation write-offs on the part of the subsidy will not be a company expense as well.
Company costs will not include depreciation write-offs on the initial value of fixed assets and intangible assets:

  1. acquired free of charge after 01/01/2018, except for those acquired by inheritance, if:
    a) the acquisition does not constitute income due to the free receipt of goods or rights or
    b) the income in this respect is exempt from income tax, or
    c) such acquisition is exempt from inheritance and donation tax, or
    d) the acquisition constitutes income on which, pursuant to separate regulations, the tax collection was abandoned,
  2. if they were acquired before January 1, 1995, but were not included in fixed assets or intangible assets,
  3. given for free use - for the months in which these components were put into free use.

Wherever the depreciation write-off is not a tax deductible cost, changes in the initial value should not result in changes in income tax. But will it always be like that?
On the other hand, when the initial value of a fixed asset increases or decreases as a result of various events, then the initial value of the fixed asset and depreciation, and sometimes only depreciation, should be adjusted.
The consequences of the above circumstances may affect the amount of income tax, may result in underpayment, but also overpayment. It all depends on which direction the change in costs will go and what period it will concern, because the adjustment of depreciation write-offs may also cover previous years.

The correction to the initial value of the fixed asset resulted from the modernization

Many taxpayers expanding their businesses, opening new branches, shops, offices, kiosks and others, have problems with the appropriate determination of the current initial values ​​of commissioned buildings due to the costs arising in the following months.
How will the updated initial value of the already commissioned fixed assets develop? When should the initial value of the asset be corrected? What tax consequences may be associated with the circumstances of the modernization of assets?

Example 4.

Mr. Łukasz sells footwear through two stores. In 04/2019, he purchased another store, and in 05/2019, it was opened and sales started. In the month of 06/2019, Mr. Łukasz incurred further expenses related to the new store, classified as an improvement, for a total amount of PLN 16,700. These expenses did not constitute a renovation of the store. What tax effects will the above transaction have?
Due to the change in the initial value of the building due to a reason other than an accounting error or an obvious mistake, this value should be updated on an ongoing basis.
Thus, the taxpayer will increase in the month of 06/2019 the initial value of the new store by the sum of all expenses for improving the store for a given month, i.e. 06/2019.
It will do it in such a way that it will add up all expenses related to the modernization at the end of the given month of 06/2019 (to which they relate) and then at the end of this month it will increase the initial value of the given asset, i.e. the new store.
As a result, higher depreciation write-offs will be established from the month following the month in which the expenses are recorded in the books, i.e. from 07/2019 and the initial value of the fixed asset is increased by their amount. However, the condition for this will be the commissioning of the improved store for use in business in 06/2019.

Receipt of the enterprise in inheritance

As a result of various life events, taxpayers who have not run a business so far, and those who run it, inherit businesses. The inherited companies may include, inter alia, assets, tools and equipment, goods, inventory, advances received and paid, unreceived receivables, payables to companies, public law liabilities, capital and others. The receipt of such an enterprise is connected with the verification of the received fixed assets and the continuation, in some cases, of making further depreciation write-offs.
However, recently the possibilities of including the company costs in the form of depreciation write-offs on fixed assets received free of charge have changed as well. What tax effects may cause changes in fixed assets received free of charge?

Example 5.

Mr. Rafał received a donation in 2016, which included, inter alia, assets (not fully depreciated) that are exempt from inheritance and donation tax. Mr. Rafał continued their depreciation and in the period from 01/2018 to 06/2018 he did not include depreciation charges in the company's costs due to the change in the regulations stating that company costs are not depreciation write-offs from the initial value of fixed assets received as a donation .
Then, from 07/2018, Mr. Rafał continued to recognize depreciation charges in costs. Can Mr. Rafał still include outstanding write-offs for the period 01-06 / 2018?
Pursuant to Art. 23 sec. 45a point of the PDOF Act, company costs are not considered to be depreciation write-offs made from the initial value of fixed assets acquired free of charge, except for those acquired by inheritance, if this acquisition does not constitute income due to the free receipt of goods or rights or
However, as is clear from Art. 4 of the Act of June 15, 2018.on the amendment to the act on personal income tax, the above provision applies to income obtained from the period 01/2018.
Therefore, the taxpayer will be required to adjust the costs in the period from 01/2018 to 06/2018 by including monthly depreciation write-offs that were not previously recorded in the taxpayer's books.
The error in interpreting the regulations by the taxpayer in this specific case will result in a reduction in the amount of monthly advances for income tax (if the taxpayer has earned income).

Problem with refinancing with a subsidy to purchase a fixed asset

More and more taxpayers benefit from co-financing the purchase of fixed assets. Co-financing may come from both national programs and EU subsidies. A taxpayer who applied for a subsidy has often encountered a long-lasting procedure of verifying the applications and selecting the taxpayers who will receive the funds. This time related, in particular, to the refinancing of the purchase of fixed assets (the acquisition of assets takes place entirely from the taxpayer's funds and then, when granting the subsidy, the funds for the prior purchase are partially or fully refunded to the taxpayer), the taxpayer is obliged to use, for example, in accordance with Art. 23 sec. 8 of the Personal Income Tax Act to make depreciation write-offs.
Taxpayers, after receiving refinancing of funds from subsidies for already purchased assets, have a problem with what to do and how with the depreciation write-offs already made.

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Example 6.

The general partnership purchased fixed assets from its own resources in 04/2019. The purchase was made under the regional operational program (RPO) in 2015. In turn, in 2016 the company applied for refinancing the earlier purchase under the RPO program. The company's shareholders had no certainty that their application would be approved and would receive a subsidy, so from 05/2019 they made depreciation write-offs on the purchased fixed assets in accordance with Art. 23 sec. 8 of the PIT Act.
Due to the prolongation of the decision, the company received refinancing funds for the purchase of assets only on September 13, 2016. The company's shareholders are wondering when they should adjust depreciation charges recognized up to the month of refinancing?
Pursuant to Art. 23 sec. 1 point 45 of the PIT Act, write-offs for the consumption of fixed assets made on the part of their value corresponding to the expenses incurred for the purchase or production on their own and then returned to the taxpayer in any form are not considered as company costs.
Therefore, if the taxpayer has been reimbursed the funds for the purchase of assets that he previously purchased (in full), the depreciation charges calculated on the initial value of these assets will not constitute company costs.
However, if the return of funds (refinancing) for previously purchased assets results in the fact that the depreciation write-offs on these assets will not be costs, the taxpayer will make adjustments on an ongoing basis, i.e. in the month of receiving the amount from the subsidy, i.e. in 09/2016.
It is worth adding that if the taxpayer would make retroactive adjustments to depreciation, then this could result in a tax arrears in income tax together with interest.
A favorable resolution of a similar type of cases related to the refinancing of the purchase of a fixed asset can also be found in the final judgment of the Provincial Administrative Court of 08/01/2015, ref. No. I SA / Łd 1125/14.