Asset Improvement and Depreciation

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An asset that has been rebuilt, extended, reconstructed, adapted or modernized is the so-called improved fixed asset. Pursuant to Art. 23 sec. 1 lit. c of the PIT Act, expenses incurred for such an improvement of a fixed asset are not directly recognized as tax deductible costs. They are charged to tax costs gradually - through monthly depreciation (the amount of the improvement of the fixed asset increases the initial value of the given asset).

Asset Improvement and Depreciation

Improving a fixed asset does not change the depreciation rules of a given asset. The only difference is that the depreciation write-offs should be made on the initial value of the fixed asset plus the sum of expenses incurred for its improvement. The previously used method - degressive or linear - remains unchanged.

Asset Improvement - Depreciation Methods

Importantly, the selected method of depreciation of a given fixed asset should be used until it is fully depreciated. When you improve an asset, you don't have to restart depreciation or change the depreciation method.

Asset improvement versus linear depreciation

If a given fixed asset was depreciated using the straight-line method before improvement, then this method should also be applied after the modifications made. The expenses incurred in connection with the improvement of the fixed asset increase its initial value. The first increased depreciation is made in the month following the month in which the improvements were made. So if the improvement took place in July, then the increased depreciation will be calculated from August.

Asset improvement versus degressive depreciation

The situation is slightly different in the case of depreciation using the degressive method. In this case, the depreciation write-offs from the entire initial value are made only in the first year of depreciation.In the following years, depreciation is calculated from the initial value, but reduced by the current depreciation charges, determined at the beginning of subsequent years of their use.

Important!

In the case of the declining method, it should be remembered that when the depreciation determined by this method in the following year is lower than the write-off determined using the straight-line method, then from the beginning of this year, the straight-line depreciation should be applied. This rule also covers improved fixed assets.

This means that if the improvement of a fixed asset took place in the first year of depreciation, then the entrepreneur may increase the initial value by the costs of the improvement still during the given year. On the other hand, if the improvement of a fixed asset takes place in the following years, then its performance will increase the value of the asset only in the year following the year in which the expenditure for the improvement was incurred.

Example 1.

The entrepreneur depreciates the machine using the degressive method from mid-May 2015. He made the improvements in January 2016. In such a situation, the value of the fixed asset will increase from the beginning of 2017.

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Upgrade an asset that has already been depreciated

What if an asset that has already expired has been upgraded? In this case, after making the upgrade, a new depreciation should be started, but only on the value of expenditure incurred on the modernization of the fixed asset. Importantly, the same method that was used for depreciation of the fixed asset should also be used here. Due to the fact that regardless of the adopted method (straight-line or degressive), depreciation of a given fixed asset always ends with straight-line depreciation, the re-start of depreciation due to the improvement of the fixed asset will be based on the straight-line method - i.e. from the month following the month in which improvements have been made.

Posting improvements to a fixed asset in the wfirma.pl system

To upgrade a fixed asset in the wfirma.pl system to an item in the company's fixed assets register, go to the EXPENSES »ADD EXPENSES» VAT INVOICE / INVOICE (WITHOUT VAT) tab. As Type of expenditure, select FIXED ASSET »FIXED ASSET IMPROVEMENT and from the list of fixed assets, indicate the one to which the improvement applies.

Improving a fixed asset means increasing its value and thus the amount of its depreciation will also be increased, which is sent to the book of revenues and expenses.