Fixed assets - everything you need to know

Fixed assets are an inseparable part of many companies. It is rare for an entrepreneur to not have any asset in the fixed assets register. Learn the most important issues related to fixed assets.

What are fixed assets?

The concept of fixed assets functions both in tax and balance law. There are three legal acts regulating the essence of fixed assets in Polish legislation. These are:

• Accounting Act of September 29, 1994 (UoR),

• the Act of February 15, 1992 on corporate income tax (CIT),

• Act of July 26, 1991 on personal income tax (PIT).

Pursuant to the provisions of the PIT Act, fixed assets are owned or jointly owned by the taxpayer, acquired or manufactured on their own, complete and fit for use on the date of acceptance for use:

• buildings,

• buildings and premises owned separately,

• machines, devices, means of transport and other items.

Moreover, the expected period of their use should be more than one year. They must also be used by the taxpayer for the purposes related to his business or put into use on the basis of a lease, tenancy or leasing agreement.

This definition implies that the need to make depreciation write-offs will arise under the following conditions:

• the value of the asset exceeds PLN 10,000,

• the asset is owned or jointly owned by the depreciable person,

• the asset is acquired or manufactured on its own,

• the asset is complete and fit for use, but in the sense in which it will perform a specific function in the business conducted by the taxpayer.

Intangible assets

Pursuant to Art. 22b paragraph. 1 of the PIT Act, intangible and legal assets subject to depreciation are acquired and suitable for economic use on the date of acceptance for use:

• cooperative ownership rights to a dwelling,

• cooperative rights to the business premises,

• the right to a single-family house in a housing cooperative,

• copyright or related property rights,

• licenses,

• rights to inventions, trademarks, utility models, industrial designs, geographical indications and topography of integrated circuits,

• value equal to the obtained information related to industrial, commercial, scientific or organizational knowledge (know-how),

- if the expected period of their use is longer than one year, and at the same time they are used by the taxpayer for the purposes related to his business activity or put into use on the basis of a license (sub-license) agreement, rental or lease agreement or other agreement of a similar nature.

Moreover, Art. 22b paragraph. 2 of the Personal Income Tax Act provides that depreciable intangible assets are also - and regardless of the expected period of their use - goodwill, if this value arose as a result of the acquisition of the enterprise or its organized part by:

• purchase,

• acceptance for paid use, and depreciation charges, in accordance with the provisions of Chapter 4a of the PIT Act, are made by the user.

Fixed assets - how to determine the initial value?

To be able to make depreciation write-offs, a taxpayer must keep a register of fixed assets. It is not necessary to include funds with a value not exceeding PLN 10,000, as well as residential buildings, apartments and cooperative ownership rights to a dwelling or business premises, the initial value of which is determined in a simplified manner (in accordance with Article 22n (3) of the Act on PIT).

The fixed asset accepted for use should be valued, ie its initial value should be determined, which is the basis for calculating depreciation charges. The vast majority of fixed assets are valued in accordance with the balance sheet and tax law, which stipulates that the initial value of fixed assets is determined in:

• purchase price - for fixed assets purchased in Poland and abroad,

• cost of production - for those produced in-house,

• market value - for a donation, unless the contract implies a price lower than the market value,

• value resulting from the valuation not higher than the market price - for fixed assets received in kind, as well as for a donation, if the market price is impossible to determine or is inadequate (overstated) in relation to the actual value of the fixed asset.

The initial value should be determined no later than in the month of taking the fixed asset into use. Once the initial value is determined, it may be changed only as a result of an improvement of the fixed asset, as well as in the event of prior determination of the initial value contrary to the provisions and in the event of a revaluation of fixed assets.

Depreciation of fixed assets

The Act on corporate income tax and personal income tax also presents the essence of depreciation. Under the tax law, depreciation means spreading over time the costs related to the introduction of specific assets into an entity. It allows you to include as costs the elements of property that are tax deductible costs, which will consequently reduce the income and thus the amount of income tax paid. The principles of tax depreciation are uniform for natural and legal persons, and the existing differences are not of fundamental nature.

The legislator introduced a number of legal obligations, failure to comply with which makes it impossible to make depreciation write-offs, which causes serious tax consequences that may be of great importance for a given entity, hence the knowledge of the correct principles of tax depreciation is one of the basic elements of running a business. If the value of the purchased item does not exceed PLN 10,000, then there is no need to enter it into the fixed assets. Such an expense can be included directly in the company's costs without the need to make depreciation write-offs. Both the PIT Act and the CIT Act provide that depreciation write-offs are made when the initial value of a fixed asset on the date of acceptance for use is higher than PLN 10,000. However, if the initial value is equal to or lower than PLN 10,000, the taxpayer does not have to classify the asset as fixed assets. If it deems it justified, it may also take the opposite decision and indicate such an asset in the fixed assets register. Then it will be possible to apply one-time depreciation.

The following are also depreciated, irrespective of the expected period of use:

• investments in foreign fixed assets accepted for use, hereinafter referred to as "investments in foreign fixed assets”,

• buildings and structures built on someone else's land,

• assets not constituting ownership or co-ownership of the taxpayer, used by him for the purposes related to the business under the agreement referred to in art. 23a point 1 of the PIT Act concluded with the owner or co-owners of these components - if, in accordance with the provisions of Chapter 4a of the PIT Act, depreciation charges are made by the user,

• maritime transport rolling stock under construction classified in the Polish Classification of Products and Services (PKWiU) in the group "Other transport equipment" with the symbol 30.11.

Depreciation should begin in the month following the month in which a given asset was entered into the register of fixed assets and intangible assets, and should be completed when the value of the depreciation write-offs are equal to the initial value of this asset. The exception is when an asset is liquidated, sold or its deficiency is found. In such a case, the last write-off should be made in the month of the occurrence of one of the above-mentioned events.

Fixed assets - types of depreciation

The freedom to choose depreciation methods and depreciation rates allowed by the balance sheet law is in practice limited by the tax system. Tax regulations set out obligatory methods of depreciation and impose the amount of depreciation rates, thus limiting the period and intensity of depreciation of fixed assets. Depreciation is made on the basis of the depreciation plan prepared using the rates provided for in the lists. The following methods of depreciation of fixed assets are possible:

• linear,

• degressive,

• one-time

• natural.

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Straight line method of depreciation

The straight-line method consists in making depreciation write-offs determined from the initial value of fixed assets and intangible assets, using the annual rate specified in the list of depreciation rates. The value of the established annual write-down is a fixed amount throughout the depreciation period.

There is also a possibility of increasing the rate in case of using a given measure in bad conditions or more intensively in relation to average conditions. The depreciation rate is then multiplied by the factor included in the list of rates.

The taxpayer may also apply individual rates, provided that a given fixed asset is entered in the records for the first time and it is included in the group of used or improved assets. The exception is investments in foreign fixed assets that do not need to be improved or used.

Declining depreciation method

The degressive depreciation method is characterized by high amounts of annual depreciation in the first years of use of the fixed asset and a shorter write-off period than in the case of the straight-line method.

The degressive depreciation method consists in the fact that depreciation write-offs are made in the first year of using machines and devices from groups 3-6 and 8 KŚT or means of transport (excluding passenger cars) using the rate given in the List of depreciation rates increased by a factor not higher than 2.0, and in the following tax years - on its initial value less depreciation write-offs to date and determined at the beginning of subsequent years of using this fixed asset. Starting from the tax year in which the annual depreciation amount determined in this way would be lower than the annual depreciation amount calculated using the straight-line method, taxpayers make further depreciation write-offs according to the straight-line method (Article 22k (1) updof and Article 16k (1) updop) .

One-time depreciation

One-time depreciation is possible for fixed assets with a value not higher than PLN 10,000. On the other hand, for fixed assets with a value above PLN 10,000, it can be provided under de minimis aid, which is granted to small taxpayers and new entrepreneurs. Its limit in 2020 is EUR 50,000.

Art. 22k sec.7 of the Personal Income Tax Act provides that taxpayers in the tax year in which they started running a business and small taxpayers may make one-off depreciation write-offs from the initial value of fixed assets included in groups 3-8 of the Classification of Fixed Assets (excluding passenger cars) . Write-offs are made in the tax year in which these assets were entered into the register of fixed assets and intangible assets, up to the amount not exceeding the equivalent of EUR 50,000.

Moreover, according to the amended art. 22k paragraph. 14-21 of the PIT Act, in a situation where the taxpayer purchases a brand new fixed asset up to PLN 100,000, it is possible to apply a one-off depreciation. The amount of PLN 100,000 includes the sum of depreciation charges and payments towards the acquisition of a fixed asset classified as tax deductible costs.

However, it should be borne in mind that the above provision applies to fixed assets included in groups 3-6 and 8 KŚT. This means that, for example, real estate (buildings and structures) and means of transport cannot be depreciated in this way. The legislator did not define the concept of brand new fixed assets.
The dictionary of the Polish language specifies that "new" means - just made, unused, undamaged, recently acquired, newly created, freshly established. At the same time, items purchased from other sellers, if they have not been used (operated) before, can also be considered brand new fixed assets.

Fixed Assets Classification (KŚT)

The Classification of Fixed Assets (KŚT) is a systematic set of objects of fixed assets, the purpose of which is, inter alia, setting rates of depreciation. The last classification of Fixed Assets (KŚT) was introduced by the ordinance of the Council of Ministers of October 3, 2016. From 2018, there was a change in the KŚT (classification of fixed assets). The new KŚT 2016 replaced the one from 2010. The numbering and names of some groups of fixed assets were changed. Taking into account the rules for the division of objects in KŚT, the following symbol structure can be distinguished: group - one-digit symbol (e.g. 1), subgroup - two-digit symbol (e.g. 12), type - three-digit symbol. At the first level of division, 10 groups of fixed assets are distinguished:

Group 0 - Lands,

Group 1 - Buildings and premises, cooperative right to commercial and residential premises,

Group 2 - Civil engineering facilities,

Group 3 - Boilers and power machines,

Group 4 - Machines, devices and apparatus for general use,

Group 5 - Specialized machines, devices and apparatuses,

Group 6 - Technical equipment,

Group 7 - Means of transport,

Group 8 - Tools, instruments, movables and equipment,

Group 9 - Livestock.

The list of annual depreciation rates is presented in Annex 1 to the Personal Income Tax Act. It contains the basic depreciation rates used in the various depreciation methods.

Investments in fixed assets

Correct classification and recording of expenses incurred for the improvement of fixed assets is often difficult for accountants and entrepreneurs. Practice shows that this is because the principles of this classification are regulated differently in many legal provisions.

Pursuant to the provisions of the Corporate Income Tax Act, an improvement takes place in the event of a conversion, extension, reconstruction, adaptation or modernization of a fixed asset. Expenses incurred for these purposes increase the value in use in relation to the value on the day of acceptance of fixed assets for use, measured in particular with the period of use, production capacity, quality of products obtained with the help of improved fixed assets and the costs of their operation.

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How to make depreciation write-offs of improved fixed assets?

As a result of improving your own fixed asset, the initial value is increased, which becomes the new basis for determining depreciation charges. The amount of depreciation for a given period changes, regardless of whether the improvement extends the useful life of a given fixed asset or not.

Suspension of business activities suspends depreciation

The legislator, by allowing taxpayers to suspend business activity, assumes that during such suspension, their fixed assets will usually not be used, and therefore cannot be depreciated. However, the taxpayer will have the right, inter alia, to to perform all activities necessary to maintain or secure sources of income.

If a specific fixed asset was used only for activities necessary to maintain or secure sources of income, then it could be depreciated.

However, in the case of non-use of fixed assets during the suspension period, these components will not be depreciated from the month following the month in which the suspension of economic activity was carried out.

Withdrawal and sale of a fixed asset

Pursuant to Art. 14 sec. 2 point 1 of the PIT Act, the sale of a fixed asset for consideration is a source of taxable income from business activity. It should be noted that in the case of sale of real estate or property rights, income will arise if the sale takes place within five years from the end of the calendar year in which they were acquired or built.

The legislator adopts a different approach to fixed assets previously withdrawn from economic activity. Income arises if 6 years have not elapsed between the first day of the month following the month in which the asset was withdrawn from activity and the date of its disposal for consideration. Consequently, after this period, the income from sales will be free from income tax.