Renewal of business premises in tax deductible costs

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After a certain period of use of the premises used in the conducted activity, it becomes necessary to renew the premises of the company. When carrying out the works, it is necessary to determine whether we are dealing with renovation or modernization. This is of key importance for the settlement of expenses incurred on this account.

Renovation of company premises - renovation or improvement?

The distinction between the concepts of renovation and improvement in terms of income taxes is very important. If expenses are incurred for the renovation of a fixed asset, regardless of their size, they will constitute tax deductible costs, and if the purpose of their incurring is to improve the fixed asset, then if their sum during the tax year exceeds the amount constituting the basis for calculating depreciation charges, they will not be treated as tax deductible costs, they will only increase the initial value of the fixed asset.

Renovation is the restoration of the original condition of a fixed asset by replacing worn-out elements or repairing them. As a result of the renovation, the value in use of the fixed asset does not increase, only the original value is restored.

On the other hand, an improvement should be classified as expenditure on a fixed asset, which primarily increases its value in use as compared to the value on the day it was put into use. The improvement should be measured, in particular, by the period of use, the production capacity, the quality of the products obtained with the improved fixed assets and the costs of their operation.

Modernization conditions

For an improvement to take place, the conditions set out in Art. 22 g of paragraph 1. 17 of the PIT Act. According to this provision, the improvement of fixed assets takes place:

  • through reconstruction, extension, reconstruction, adaptation or modernization,

  • when the sum of expenses incurred for the reconstruction, expansion, reconstruction, adaptation or modernization in a given tax year exceeds PLN 10,000,

  • when the incurred expenses cause an increase in the value in use in relation to the value on the day of acceptance of fixed assets for use, measured in particular with the period of use, production capacity, quality of products obtained with the help of improved fixed assets and the costs of their operation.

The treatment of specific works as renovation or improvement is not determined by the will of the taxpayer, but by the material scope of the works performed. In doubtful cases, it may be necessary to appoint a construction expert. It is often difficult to decide unambiguously on one's own whether the scope of the works carried out can be classified as renovation or should be considered modernization.

Thus, the method of its settlement will depend on the type of expenditure. This position is also confirmed by the tax authorities, an example of which is the individual interpretation of the Director of the National Tax Information of April 14, 2017, No. 0461- ITPB3.4510.22.2017.1.AK. Describing the facts, the taxpayer indicated that he had carried out construction work in connection with the replacement of the sanitary installation in the bathroom in the workshop he was using. They consisted, inter alia, of Forging tiles from walls and floors, replacing them with new ceramics, as well as supplementing plumbing and electrical installations, and installing new fittings. In response, the director indicated that:

"(...) since the construction works carried out in the bathroom of the workshop were of a reconstruction nature, only restoring its original value and did not change its character, the expenses incurred by the Applicant were of a renovation nature.

In conclusion, the expenses related to construction work in the bathroom located in the workshop, the purpose of which was to restore the original functional capacity of the bathroom, (...), constitute indirect tax deductible costs deductible on the date they are incurred (...) ".

Window replacement

Some expenses are difficult to allocate to the renovation or modernization category. An example is the cost of replacing windows. The problem becomes more complicated when windows are replaced with more modern ones, e.g. wooden for aluminum. In our opinion, such works are of a reconstruction nature, restoring only the original use value of the building and they do not change its character. Moreover, for the classification of the indicated works as renovation, it is irrelevant that the replaced elements are replaced by elements made of more modern materials. The costs of replacing windows do not increase the value in use of a given object (building, structure).

Bearing the above in mind, it should be stated that the costs of replacing windows should be included as the cost of renovation. They cannot be added to the initial value of fixed assets. Such a position was confirmed by the Director of the Tax Chamber in Katowice in the letter No. IBPBI / 2 / 423-1155 / 11 / MS of December 31, 2011, which reads:

“(…) The facts presented in the application show that the works performed are dictated by the poor technical condition of the windows. However, these works do not change their character and functions. Wooden windows are replaced with aluminum windows. The replacement of windows is due to the wear of old windows.

In the light of the above, it should be considered that the expenses incurred by the Company for the replacement of windows will be of a reconstruction nature, not changing the operational or technical parameters, restoring the original usable capacity of the building, and therefore they should be considered renovation expenses. However, due to the fact that their relationship with the revenues generated by the Company is not direct, they should be considered as indirect tax deductible costs (…) ”.