Sale of a fixed asset before the end of the year and cost adjustment

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Entrepreneurs use fixed assets in their business, which are depreciated by them. It often happens that they sell a fixed asset within one year of starting their use. In such a situation, the question arises whether the fixed asset should be reclassified into a commodity and depreciation write-offs should be adjusted?

Subject of depreciation

In the case of fixed assets and intangible assets, the deductible cost are write-offs for their use (depreciation write-offs). On the other hand, depreciation is, in principle, subject to:

  • structures, buildings and premises owned separately,

  • machines, devices and means of transport, as well

  • Other items.

It should be noted that the depreciated assets must be owned or jointly owned by the taxpayer. They can be purchased or manufactured on their own, but it is necessary that they are complete and fit for use on the day they are accepted for use. The expected period of use may not be less than one year, and these items must be used by the taxpayer for the purposes related to his business activity or put into use on the basis of a lease, tenancy or leasing contract.

The period of use, rate and method of depreciation of fixed assets is required by the entrepreneur before entering them into the records.

As can be seen, one of the conditions for recognizing an asset as a fixed asset is its useful life, which should not be shorter than one year. However, it is up to the taxpayer to decide how long the asset will be used by the taxpayer for the purposes related to the conducted business activity.

Depreciation write-offs from the fixed asset

Pursuant to Art. 22i paragraph. 1 of the PIT Act, depreciation write-offs on fixed assets are made using the depreciation rates specified in the List of depreciation rates.

The regulations do not give any guidance as to what to follow when predicting the period of use. This assessment may be based on subjective predictions. If the taxpayer assumes that the period of use of the asset will be longer than one year, then it has the right to include as tax deductible costs the depreciation write-offs made in accordance with the provisions of the relevant Income Tax Act.

Sale of a fixed asset before the end of the year

Thus, the sale of fixed assets or intangible assets within one year of their acquisition does not result in a retroactive reclassification of these fixed assets or intangible assets. In such situations, there are no legal grounds to reclassify them, i.e. to recognize them as commercial goods. As a consequence, there is also no need to adjust the depreciation write-offs previously recognized as tax deductible costs made in the period of actual use of the above-mentioned devices as fixed assets in the conducted business activity.

Bearing in mind the above, it should be stated that the taxpayer is not obliged to correct the already made depreciation write-offs.

This position is also confirmed by the tax authorities, an example of which is the letter of the Director of the Tax Chamber in Katowice of August 17, 2016, file ref. IBPB-1-2 / 4510-73 / 16-1 / MW, in which we can read:

"(...) Art. 16 of the CIT Act does not contain provisions that would prohibit or exclude from tax deductible costs the depreciation write-offs made on fixed assets or intangible assets subject to depreciation, which were sold before the expected period of their use, exceeding one year.

Thus, the sale of fixed assets or intangible assets within one year of their acquisition does not result in retroactive reclassification of these fixed assets or intangible assets.

The above is confirmed by the positions of the tax authorities. An example is the individual interpretation of the Director of the Tax Chamber in Katowice of November 19, 2014, reference number: IBPBI / 2 / 423-1026 / 14 / AP, in which the tax authority agreed with the Applicant's position that:

In the described future event, there is no obligation to correct the depreciation write-offs made for the given / data WNiP, sold / sold within one year of its purchase (…) ”.

Revenue from the sale of a fixed asset and costs

Income from economic activity is generated, inter alia, by as a result of the sale of fixed assets for consideration (Article 14 (2) (1) of the PIT Act). In turn, the tax deductible cost is in this case the net value of a given fixed asset, calculated as the difference between the initial value and the sum of the depreciation write-offs (Article 23 (1) (1) of the PIT Act).

As it results from the above provision, the non-depreciated value of a fixed asset is a tax deductible cost in determining the income from the sale of an asset for consideration at the time of sale.

Example 1.

The taxpayer purchased the engraving machine with the idea that he would be using it for several years. After the purchase, he entered it into the fixed assets register and began to depreciate it. However, due to the development of the company, he had to buy a more efficient machine. Therefore, he decided to sell the previous one before the end of the year. In such a situation, the fixed asset should not be reclassified as an item and the costs should not be adjusted. Sales should be accounted for on general terms. The cost of obtaining income in the case of sale of a fixed asset before the end of one year from the date of entry into the register of fixed assets is the non-depreciated value of this fixed asset.