What are the tax consequences of donating a fixed asset?
A fixed asset that is no longer useful in the company can be sold or liquidated. It is also acceptable to donate it. However, before the entrepreneur decides to take such a step, it is worth finding out about the tax consequences of the donation of a fixed asset.
Donation of a fixed asset in income tax
The donation of the fixed asset will be neutral for the entrepreneur's income tax. The donation does not generate income for the donor, as it is a free transfer - unlike, for example, the sale of a fixed asset. It is also irrelevant for income tax purposes whether the transfer takes place in the course of the economic activity or after its termination.
Receiving a donation will also not result in an obligation under the recipient's income tax, as the provisions of the Personal Income Tax Act do not apply to revenues subject to the provisions on inheritance and donation tax (Article 2 (1) (3) of the CIT Act).
Inheritance and donation tax
The tax obligation on the basis of inheritance and donation tax will always be imposed only on the recipient, i.e. the buyer of the goods. However, this does not mean that you must pay tax in all cases. The Act provides for tax exemption for persons from tax group I, i.e. the spouse, ascendants, descendants, stepson, siblings, stepfather and stepmother, provided that they report the donation in due time. However, if the value of the donation does not exceed the statutory limit, the recipients from the first tax group do not have to report the fact of receiving the donation.
Donation in the light of VAT
An entrepreneur who wants to donate to a third party the company's assets should take into account the need to tax such an event with value added tax. According to Art. 7 sec. 2 of the VAT Act, this tax is also subject to the free transfer by the taxpayer of goods belonging to his enterprise, in particular:
- the transfer or consumption of goods for the personal purposes of the taxpayer or its employees, including former employees, partners, shareholders, shareholders, members of cooperatives and their household members, members of the governing bodies of legal persons, members of the association,
- any other donation,
- if the taxpayer was entitled, in whole or in part, to reduce the amount of tax due by the amount of input tax on the acquisition, import or production of these goods or their component parts.
Therefore, in the case of donation of items for which the taxpayer was entitled to deduct input VAT in part or in full, it is necessary to tax them with value added tax. On the other hand, in a situation where, when purchasing a given component, the entrepreneur was not entitled to reduce the amount of tax due by the amount of the input tax, the donation of this component will not be subject to taxation.
The exception in this matter is the disposal of the enterprise or its organized part, as referred to in Art. 6 of the VAT Act. In such a case, the provisions of the VAT Act do not apply, therefore this activity is not subject to this tax.
Depreciation of a donated property
The donation of a fixed asset is associated with the cessation of depreciation write-offs. The donor donating a fixed asset shall make depreciation write-offs by the end of the month in which he made a free transfer under the donation agreement. The remaining, not depreciated part, however, cannot constitute tax deductible costs and should not be included in costs.
In the case of the recipient - if he runs a business, he has the right to make depreciation write-offs on the fixed asset received as a donation and include them in tax costs. These write-offs should be made from the properly determined initial value, which is the basis for calculating the write-offs.
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Initial value of the asset from the donation
The initial value of the fixed asset received by way of donation should be determined in accordance with art. 22 g of paragraph 1. 1 point 3 of the CIT Act, ie at the market value as at the date of purchase. In this case, the date of purchase is the date of receipt of the donation. If the donation agreement specifies a lower value of an asset than that resulting from the market valuation, then the lower amount should be taken as the initial value.
As you can see, as a rule, a donation does not result in too high tax obligations, both on the part of the donor and the recipient. However, it is worth remembering even about these small obligations so as not to expose yourself to possible penal and fiscal consequences.