Outlays for the improvement of the jointly owned building
Co-ownership means that a given thing belongs wholly to all co-owners, and each of them has all the rights related to the owned property. The subject of joint ownership is always a specific thing, such as a building. What if the jointly owned object is used in the business of the joint owner? How do you count as costs for improvement of a co-owned building as tax deductible costs?
Co-ownership of the building and its initial value
An asset that is jointly owned by the entrepreneur may be included in the company's fixed assets. The amount of depreciation then depends on the initial value, which is determined in a special way in the case of joint ownership. Pursuant to the provisions of the Personal Income Tax Act, the taxpayer should determine the initial value of an asset in the proportion in which it holds shares.
Thus, when determining the initial value of a building owned jointly by the entrepreneur, he should first determine the total value of the building, and then separate the initial value for his needs - in accordance with the shares held in a given asset.
Methods of determining the initial value of the building
As a rule, the initial value of a building that will constitute a fixed asset subject to tax depreciation can be determined according to the following methods:
in a simplified manner - as the product of usable space used for business operations and the rate of PLN 988 per sqm.
at purchase price by purchase,
according to the cost of production - when it comes to a self-constructed building.
Co-ownership received by donation
If the co-owned building was acquired as a donation, its initial value is the market value at the date of purchase or the value specified in the donation agreement (provided that it was not lower than the market value). The market value is determined on the basis of the average prices in a given region in the trade of things of the same type and species, taking into account, inter alia, their condition and degree of wear.
Renovation and improvement of a jointly owned building
Pursuant to the provisions of the Building Law Act, renovation is considered to be the performance of construction works in an existing building in order to restore its original condition. Improvement of a fixed asset is its extension, reconstruction, modernization or reconstruction so that the value in use of the improved asset after the modernization is completed exceeds the value it had on acceptance (Article 31 of the Accounting Act). Fixed assets are considered to be improved when the sum of expenses incurred for their reconstruction, extension, reconstruction, adaptation or modernization in a given tax year exceeds PLN 3,500.
Co-ownership building improvements and tax deductible costs
If the expenses incurred for the renovation or improvement of the co-owned building meet the relevant conditions, specified e.g. in the Personal Income Tax Act, as a rule, they may constitute a tax deductible cost. However, the method of including them in the costs is not the same. Expenses for renovation of the building can be booked by the taxpayer directly into company costs on the day they are incurred. On the other hand, the sum of expenses allocated to the improvement of a building that is co-owned (fixed asset) is recognized in costs through depreciation.
Expenditure on improving a jointly owned building and the initial value
Pursuant to the provisions of the PIT Act, the amount of the improvement should be added to the initial value of the building / fixed asset and from that moment increased depreciation write-offs should be made.
Therefore, if the fixed asset has undergone an improvement, its initial value should be increased by the sum of the expenses related to the improvement and depreciation write-offs should be made from the value so determined. From the increased initial value, they are made starting from the month following the month in which the fixed asset was improved. Depreciation write-offs should be made in accordance with the previous depreciation method.
However, the Personal Income Tax Act does not specify what to do in the event of improvement of a co-owned building. However, there are no regulations that would limit the possibility of increasing the initial value of a fixed asset by all expenses incurred for its improvement, just because the improved fixed asset is jointly owned by the entrepreneur. Moreover, according to the regulations, even outlays incurred to improve a foreign fixed asset may be fully accounted for in tax deductible costs on the basis of depreciation write-offs.
Improvement of a co-owned building - position of the tax authorities
Among the interpretations issued by the tax authorities, however, there are opinions that the tax deductible costs (based on depreciation write-offs) can only include the part of the expenses incurred for the improvement of the building being co-owned, which the given entrepreneur has in its ownership. An example may be the individual interpretation of the Director of the Tax Chamber in Bydgoszcz of March 15, 2013, no. ITPB1 / 415--1317 / 12 / WM):
“The applicant owns a 50% interest in a real estate developed with a building in which he conducts business activities. The second co-owner is the Applicant's brother, who also runs a separate business in this property. [...] The extension of the building will consist in adding it to the existing building. [...] The costs of extending the building will be borne solely by the Applicant. The added part of the building will be used only for the needs of the business activity conducted by the Applicant. [...] In view of the above, the expenses incurred by the Applicant for the extension of the common building, which is a fixed asset, used in separate business activities by the Applicant and his brother, will increase the initial value of this fixed asset, in accordance with Art. 22 g of paragraph 1. 17 of the Personal Income Tax Act. [...] The cost of obtaining income for the non-agricultural business activity conducted by the Applicant will therefore be depreciation write-offs made on the increased initial value of this fixed asset - however, in such proportion to its value as the Applicant's share in the ownership of this asset. "