The car received as an award in the competition and depreciation

Service-Tax

The assets owned or jointly owned by the taxpayer, acquired or manufactured on their own, which are complete and fit for use on the date of acceptance for use, with an estimated useful life of more than one year, are depreciated. Additionally, these components should be used in the conducted business activity. Both assets acquired for consideration and free of charge are subject to depreciation. Is a car received as a lottery prize and entered into fixed assets also depreciated?

Car awarded as a prize in a competition - setting the initial value

According to Art. 22g section 1 updof, the initial value of a fixed asset received free of charge shall be the market value on the day of purchase or the value specified in the free transfer agreement if it was lower than the market value.

The market value, on the other hand, is determined on the basis of market prices used in the trade of things or rights of the same type and species, taking into account, in particular, their condition and degree of wear, as well as the time and place of sale against payment.

Example 1.

Entrepreneur Tomasz. in 2018, it won a car in a competition organized in the local press. At the same time, the competition sponsor provided the entrepreneur with a copy of the car purchase invoice along with the contract for free car delivery.

At the beginning of 2019, the entrepreneur registered a business in which the car received as a prize is to be donated for company purposes. How should he determine the initial value of the car?

In the event of acquisition of a fixed asset free of charge, its initial value is considered to be the market value on the day of purchase or the value specified in the free transfer agreement, if it was lower than the market value. Additionally, the entrepreneur should bear in mind that there are often situations when the competition organizers buy a vehicle at a lower price than the market price. Car dealers give discounts on cars that are prizes in the competition. In such a case, the initial value is the value resulting from the purchase invoice received from the organizer.

Depreciation of the car won in the competition

The basic method of depreciation in the case of passenger cars is the straight-line method with the application of the 20% rate, resulting from the list of depreciation rates. However, entrepreneurs have the option of applying an individual depreciation rate for used or improved vehicles.

Pursuant to Art. 22j updof for a used fixed asset should be understood as an asset entered in the fixed assets register for the first time, when the entrepreneur will be able to prove that the vehicle was used for at least 6 months before its purchase.

On the other hand, improved fixed assets include assets if, before being entered into the records, the expenses incurred by the taxpayer for the improvement constituted at least 20% of the initial value

Both the car received as a prize and the car purchased by the entrepreneur are subject to a depreciation period of not less than 30 months.

The car received as an award in the competition - depreciation write-offs as a tax cost

Taxpayers should note that sometimes depreciation write-offs from the initial value of a fixed asset may not constitute a tax cost. This applies to situations where a fixed asset was acquired free of charge, except for those acquired by inheritance or donation, if:

  • this acquisition does not constitute income from the gratuitous receipt of goods or rights, or

  • this income is exempt from income tax, or

  • this acquisition constitutes income on which, pursuant to separate provisions, the tax collection was abandoned.

In other words, depreciation write-offs on fixed assets received free of charge may constitute a tax cost, as long as its acquisition creates income for the entrepreneur due to the free receipt of goods, and thus is subject to personal income tax. Therefore, it would be necessary in the first place to determine whether the acquisition of the fixed asset constituted taxable income (it does not matter whether the income relates to the activity or other sources).

Entrepreneurs should remember about the limitations as to including depreciation write-offs from the initial value of a passenger car. Because under Art. 23 section 1 of the updof may not constitute a tax deductible cost, depreciation write-offs in the part that exceed the amount of PLN 150 thousand. zloty.