Replacement of worn out components of a fixed asset

In their activities, entrepreneurs very often use fixed assets. During their operation, over time, various components in a given fixed asset wear out. This involves the replacement of worn parts. Therefore, the question arises whether the incurred expenses can be classified as tax costs?

Classification of expenses for the used components of the fixed asset

Expenses incurred for the replacement of worn components may be classified as repair expenses or result in an improvement of a fixed asset. Depending on this qualification, expenses for the replacement of worn components can be directly classified as tax deductible costs or they can increase the initial value of a fixed asset, and thus, constitute a tax deductible cost at the time of making depreciation write-offs. Appropriate qualification is an individual matter, which means that each case of replacement of components requires a separate assessment of the nature of the expenses incurred.

Improvement - what is it?

Pursuant to the Income Tax Act, an improvement may take the form of reconstruction, extension, reconstruction, adaptation or modernization. Fixed asset expenditure should be considered an improvement if the following conditions are cumulatively met:

• the sum of expenses incurred for the purchase of components during the year exceeds PLN 10,000;

• as a result of replacement of component parts, the value of the fixed asset increases compared to its value on the day it is put into use.

Cost of replacing component parts as an asset upgrade

If the acquired component parts meet the above conditions, they constitute an asset upgrade. In such a situation, the costs of replacing the used component parts are added to the initial value of the fixed asset. Therefore, the settlement of these expenses is made through depreciation in accordance with the adopted method and rate of depreciation.

Renovation - what is it characterized by?

Renovation consists in replacing used components with the same, with identical or similar parameters. Its purpose is to continue using a given fixed asset to the same extent as before. Renovation consists in restoring the original technical condition, without changing the nature and functions of the fixed asset.

The cost of replacing components as a renovation

Renovation does not increase the value of the fixed asset, it only restores its initial properties. It enables the further use of a fixed asset, according to its economic purpose. May involve the replacement of worn parts. In a situation where the replacement of worn out components is treated as a renovation, then the expenses incurred for its implementation are recognized directly as tax deductible costs at the time they are incurred.

In connection with the above, when replacing the components of a fixed asset, the classification of the incurred expenses may be different. Therefore, before booking the expenditure incurred, you should consider whether you are dealing with an improvement or a renovation.