Renovation and improvement of the fixed asset

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Time does not save anyone or anything - the equipment and buildings included in the company's fixed assets are also getting old. The entrepreneur may improve or repair such elements already functioning in the company. However, it should be remembered that these two concepts are not unambiguous, also for tax. Renovation and improvement - how do they differ? We explain.

Renovation versus improvement of a fixed asset - when is it a cost?

Expenses incurred for the renovation or improvement of a fixed asset may, in principle, be classified as tax deductible costs - if, of course, they meet the relevant conditions, specified e.g. in the PIT Act. However, it is not done in the same way. The taxpayer can book the renovation expenses directly in company costs. On the other hand, the sum of funds allocated for the improvement is recognized in company costs through depreciation - the amount of the improvement should be added to the initial value of the fixed asset and from that moment increased depreciation write-offs should be made.

How, then, to distinguish whether activities performed on fixed assets constitute a renovation or an improvement?

What is an Asset Upgrade

Based on Art. 31 of the Accounting Act, it can be stated that the improvement of a fixed asset is its extension, reconstruction, modernization or reconstruction causing that the value in use of the improved equipment after the completion of the modernization exceeds the value it had upon acceptance. This value is measured by the useful life, production capacity, quality of products obtained with the improved fixed asset, operating costs and other measures.

When we talk about renovation

When it comes to renovation, its definition can be based on the Construction Law Act. Pursuant to the provisions contained therein, renovation is considered to be the performance of construction works in the existing building in order to restore the original condition. Thus, the renovation of a fixed asset can be used to define all actions to restore it to its original state, lost due to wear and tear and the passage of time. However, such an operation cannot increase the technical or use value of a fixed asset.