Methods of depreciation of fixed assets - worth knowing!
Tax depreciation is a very profitable form of saving money for the taxpayer. As you know, virtually all fixed assets are destroyed sooner or later.Therefore, at the time of purchase, it is a good idea to establish the cost of their consumption over time. Depreciation consists in systematically writing off the agreed amount to the company's costs, until the fixed asset is completely consumed. Learn about depreciation methods for fixed assets.
Methods of depreciation of fixed assets
There are three methods of depreciation of fixed assets:
- linear method,
- degressive method (declining balance),
- natural method.
Each of them has its advantages and disadvantages, so it is good to know them thoroughly before the taxpayer decides on a specific method - because once the method has been chosen, it is impossible to change any more.
Depreciation of fixed assets - straight-line method
The straight-line method is the most popular and recognized as the simplest method of depreciation of fixed assets. In this situation, the taxpayer assumes that the wear and tear of the fixed asset will be even throughout its lifetime. Then, depreciation write-offs are determined in accordance with the depreciation rates contained in Annex 1 to the PIT and CIT Act, and these are determined based on the Classification of Fixed Assets (KŚT).
In the straight-line method, the depreciation costs are calculated individually by each taxpayer. If he wants to know what the annual depreciation amount will be, he has to use the following formula:
FIXED ASSET VALUE x ANNUAL PERCENTAGE FIXED RATE
However, if he is interested in the amount of the monthly depreciation amount, it is enough to divide the obtained result by 12, i.e. the number of months in a year.
In June 2018, the XYZ company purchased a machine for construction works worth PLN 450,000, which was classified as the company's fixed assets. The taxpayer chose the straight-line method of depreciation. The depreciation rate according to the list is 20%.
annual depreciation - 450,000 x 20% = PLN 90,000
monthly depreciation value - 90,000: 12 = 7,500 PLN
XYZ will make the following depreciation write-offs:
for July 2018 - December 2017 (6 months) - 7,500 x 6 = 45,000 PLN
2019 - PLN 90,000
2020 - PLN 90,000
year 2021 - PLN 90,000
year 2022 - PLN 90,000
in 2023, PLN 45,000 will remain to be amortized.
The monthly depreciation value is PLN 7,500, therefore:
PLN 45,000: PLN 7,500 = 6 - months of amortization in 2023
The depreciation will end in June 2023.
Interestingly, taxpayers depreciating an asset using the straight-line method may lower the depreciation rate in the course of the process. Its change may be made many times, and the regulations do not specify the level to which the depreciation rate can be reduced.
Depreciation of fixed assets - individual linear method
The taxpayer may set the rate individually when the acquired fixed assets are used or improved. However, it has the right to do so only when the fixed assets are entered into the company's records for the first time.
In such situations, individual categories of fixed assets must have minimum depreciation periods. The classification is presented below.
for groups 3-6 and 8 KŚT:
- 24 months - when the initial value is less than PLN 25,000,
- 36 months - when the initial value is greater than 25,000 PLN, but less than or equal to 50 thousand. zloty,
- 60 months - in other cases;
for means of transport:
for non-residential buildings (premises) for which the depreciation rate from the List of depreciation rates is 2.5%:
- 40 years - reduced by the full number of years that have elapsed from the date they were put into use for the first time until the date of entry into the TA and WNiP records kept by the taxpayer, provided that the depreciation period cannot be shorter than 10 years for other buildings (premises) and buildings,
- 10 years (except permanently land-bound commercial and service buildings listed in type 103 of the Classification and other non-residential buildings listed in type 109 of the Classification, permanently land-bound goods kiosks with a cubature of less than 500 m3, camping houses and substitute buildings for which the period of depreciation cannot be less than 3 years).
Additionally, the taxpayer must prove that the fixed asset acquired by him is used at least:
- 6 months - in the case of fixed assets from groups 3-6 and 8, as well as in the case of means of transport
- 60 months - in the case of buildings and structures listed in art. 22j paragraph. 1 point 3 of the PIT Act and Art. 16j paragraph. 1 point 3 of the CIT Act
However, for an improved measure to be considered such, the improvement must be:
- 20% of the initial value - in relation to fixed assets included in groups 3-6 and 8 KŚT and means of transport
- 30% of the initial value - in relation to buildings and structures
Depreciation of fixed assets - accelerated linear method
In exceptional cases, the depreciation rates, which are given in the List of Rates, may be increased accordingly. This applies to fixed assets that are used in a special way. For selected fixed assets, a specific factor is applied, which is enough to be multiplied by the depreciation rate of this fixed asset:
- 1,2 - for buildings and structures used in degraded conditions,
- 1.4 - for buildings and structures used in bad conditions,
- 1.4 - for machines, devices and means of transport (except for marine rolling stock) used more intensively than in average conditions or requiring particular technical efficiency,
- 2.0 - for machines and devices included in groups 4-6 and 8 KŚT subject to rapid technical progress.
All the arrangements for increasing the depreciation rate can be found in the PIT Acts (Art. 22i, sections 2-7) and CIT (16i, sections 2-7).
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Depreciation of fixed assets - degressive method
In order to use this method of depreciation, the taxpayer's fixed assets must be machines and devices belonging to the groups: 3-6 and 8 KŚT. The degressive method also applies to all means of transport, except passenger cars.
Declining depreciation is the second most popular depreciation method of choice for taxpayers. In this case, the depreciation value changes as the asset's performance declines over the life of the asset. Therefore, if the entrepreneur wants to evenly assume the costs for all products made, he should adopt a decreasing depreciation rate. For the first year of using the declining depreciation, the rate specified in the Schedule shall be applied, however multiplied by a factor (maximum 2.0).
In order to calculate the rate for the next tax year, the entrepreneur subtracts the accumulated depreciation entries from the net amount of the fixed asset used. However, this method cannot be used indefinitely. The taxpayer must change to the straight-line method when the value of the annual write-off turns out to be lower than the value of the annual write-off in the case of the straight-line method.
The transition from the declining to the straight-line method takes place at the beginning of a new tax year. Therefore, at the end of the year, the entrepreneur should calculate the value of the annual write-off in the degressive method and compare it with the value that he will receive with the straight-line method.Example 2. In January 2019, the XYZ company purchased a machine for construction works worth PLN 450,000, which was entered in the fixed assets register in the same month. Due to the fact that it is a device from the 5th group of KŚT, the company used a degressive method of depreciation. The taxpayer used the coefficient of 2.0. The rate from the List is 20%, therefore the increased rate - 40%.
The following depreciation will be made:
basis for calculating the rate: PLN 450,000
annual allowance: 450,000 x 40% = PLN 180,000
monthly allowance PLN 180,000: 12 months = PLN 15,000 due to the fact that we start depreciation in February:
in 2019, we will make 11 monthly depreciation write-offs:
PLN 15,000 x 11 months = PLN 165,000
basis for calculating the rate PLN 450,000 - PLN 165,000 = PLN 285,000
annual allowance: PLN 285,000 x 0.4 = PLN 114,000
monthly write-off: PLN 9,500.00
basis for calculating the rate (PLN 450,000 - PLN 165,000 - PLN 114,000) = 171,000
annual write-off: 171,000 x 0.4 = 68,400 ---> lower write-off than in the case of the straight-line method of depreciation *
FROM 2021, THE LINEAR CUSHIONING SHOULD BE STARTED rope method
PLN 171,000 remained to be amortized
annual write-off: PLN 90,000
monthly write-off: PLN 7,500
PLN 81,000 remained to be amortized
the last depreciation will occur in November 2022.
January - October: 7,500 x 10 months = PLN 75,000
PLN 6,000 will remain for amortization
November - 6000 PLN
* value of the annual depreciation charge according to the straight-line method: PLN 90,000
One-off depreciation of fixed assets
One-off depreciation is possible for fixed assets with a value not exceeding PLN 10,000 (by the end of 2017, this limit was PLN 3,500). Another type of preference is the one-off depreciation of brand new fixed assets included in groups 3-6 and 8 KŚT (i.e. without cars).
The limit of one-off depreciation that each entrepreneur can use is PLN 100,000 in a given year. However, to do so, additional conditions must be met. The right to a one-off depreciation when purchasing factory-new fixed assets is granted provided that:
1) the initial value of one fixed asset acquired in the tax year is at least PLN 10,000 or
2) the total initial value of at least two fixed assets purchased in the tax year is at least PLN 10,000, and the initial value of each of them exceeds PLN 3,500.
Another method for a one-off depreciation, also for equipment with a value above PLN 10,000, is to use de minimis aid. This can be done if the fixed assets are included in the group 3-8 KŚT, excluding passenger cars.
One-time depreciation under the de minimis aid of fixed assets is an offer for the so-called small taxpayers and entrepreneurs who have just started their business in a given year. It is worth knowing that the total amount of one-off depreciation in one year may not exceed the amount of PLN 50,000. euro. If the write-off does not cover the entire initial amount of the fixed asset, the next write-off can be made only in the next tax year. Every year, the taxpayer receives a new limit of PLN 50,000. Euro, however, the "saved" limit is not carried over to the next year.
Example 3.In January 2019, the XYZ company purchased a machine worth PLN 450,000 and entered it in the fixed assets register in the same month. This device belongs to the 5th group KŚT, and the company XYZ is considered a small taxpayer - which allowed to use the right to one-time depreciation. The depreciation rate from the List is 14%. The following depreciation write-offs were made:
in January 2019, a write-off of PLN 214,000 was made (the amount of the one-off depreciation limit in 2019)
in the following years, depreciation write-offs are made in accordance with the straight-line method, calculating the write-off from the initial value:
annual allowance PLN 450,000 x 14% = PLN 63,000
monthly allowance PLN 63,000: 12 months = PLN 5,250
PLN 236,000 remained to be amortized (450,000 - 214,000)
in 2020 - PLN 63,000
in 2021 - PLN 63,000
in 2022 - PLN 63,000
in 2023, PLN 47,000 will remain to be amortized, the last depreciation will be made in October 2023 and will amount to PLN 5,000. To sum up, depending on the adopted method of depreciation of fixed assets, the taxpayer makes depreciation write-offs in accordance with the list of rates. However, it should be remembered that in order to apply certain depreciation methods, the taxpayer must meet certain conditions.