Home

Global

Contact

de|en|pl

49 countries – 110 offices – 5.800 colleagues – 1 firm |

Worldwide

We use cookies to personalise the website and offer you the greatest added value. They are, among other purposes, used to analyse visitor usage in order to improve the website for you. By using this website, you agree to their use. Further information can be found in our data privacy statement.

Depreciation of tangible assets – key information

Joanna Biguszewska

19 July 2023

Depreciation of tangible assets reflects the gradual and systematic wear and tear of the company's property (tangible and intangible assets) as it is used in business activity. As assets wear out, their value decreases. Taxpayers can, therefore, make depreciation charges on tangible assets.

What are tangible assets?

Tangible assets are assets owned or co-owned by the enterprise, acquired or manufactured, complete and ready for use. These can be real property (such as buildings, land), but also machinery, equipment and vehicles. The taxpayer is obliged to use them for business purposes or may lease or rent them under a relevant agreement.

Depreciation – what is it?

Depreciation is a process of distributing the costs associated with the acquisition of non-current tangible or intangible assets over a certain period. It is an accounting method which allows capital expenditures to be presented as expenses for the use of these assets over a certain period.

Some assets, such as real properties, machinery and equipment, have a long economic useful life, their value decreases gradually as a result of their use, wear and tear or technological progress. Depreciation aims to reflect this decrease in value by including it in the enterprise’s operating expenses over a defined period.

Various assets are subject to depreciation – these include without limitation:

– buildings,

– vehicles,

– software,

– patents,

– trademarks,

– R&D investments.

Depreciation for tax purposes

Tax depreciation refers to a method of calculating and accounting for the depreciation of tangible assets for tax purposes. In this process, a company discloses the decrease in the value of its tangible assets as tax-deductible expenses in a defined period.

Tax depreciation differs from accounting depreciation which is used for accounting and financial purposes. Tax laws often stipulate specific depreciation rules and rates which may differ from those applied in accounting.

There are, for example, specific depreciation rates for different tangible assets. The company may be obliged to apply those rates to calculate depreciation for tax purposes and to disclose them as tax-deductible expenses to reduce income for tax purposes.

Depreciation for tax purposes may also be subject to special provisions on accumulated depreciation, such as tax reliefs or accelerated depreciation for specific industries, investment projects or geographical areas. Such legislation is meant to encourage businesses to invest in new tangible assets and stimulate economic growth.

Depreciation for accounting purposes

The Polish rules of depreciation for accounting purposes are set out in the Accounting Act of 29 September 1994.

The Accounting Act defines what types of assets may be amortised/depreciated, i.e. buildings, machinery and equipment, software, trademarks, patents etc.

For accounting purposes, a depreciable asset should be depreciated over its economic useful life. The economic useful life of an asset is the estimated period over which the asset will bring economic benefits to the entity. It is a period in which the tangible asset will be used in trade and generate income for the company.

The economic useful life of an asset may differ from its physical useful life. This means that although an asset may still be useful in practice, its economic usefulness may be limited due to changing economic or technological factors or changing market trends.

Estimating the economic useful life is important for depreciation purposes because it affects the time over which the cost of an asset can be spread over time. The economic useful life may vary depending on the type of asset and the industry. For example, in the case of production machinery, the economic useful life may be a few years, while in the case of software it may be shorter due to rapid technological progress.

To accurately determine the economic useful life, companies often rely on market analyses, sales forecasts, observation of competitors and their own experience in the industry. It is important to estimate the economic useful life on the basis of reliable data and thought-out analyses to ensure the accurate calculation of depreciation costs and the correct disclosure of tangible assets in the company's books of account. The depreciation periods and rates should be periodically reviewed for correctness.

What are the current depreciation rates for tangible assets?

The Accounting Act does not set out specific depreciation rates for particular types of assets. Depreciation rates should be determined in compliance with the accounting principles and take into account the specific nature of the industry and the tangible assets held by the company.

Depreciation methods

There are several depreciation methods to account for the costs of depreciation of tangible assets. The most frequently used are:

Linear depreciation

This is the simplest and the most frequently used depreciation method. It spreads the cost of a tangible asset evenly over its useful life. In this method, the annual depreciation cost is calculated as the difference between the initial and residual value of the asset divided by its useful life.
Declining balance method

In the declining balance method, depreciation amount is higher in the initial years of the asset’s life and then gradually decreases in subsequent years. There are two main declining balance methods:

a) fixed-interest declining balance method

In this method a fixed depreciation rate is set and applied to the net balance of the tangible asset at the beginning of each year. For example, if the established declining balance rate is 20%, in the first year of depreciation it will be applied to the net value, and in the subsequent years – to the net value less the previous year’s depreciation amount.

b) proportional-interest declining balance method

This method applies a fixed percentage rate to the net value of the tangible asset at the beginning of each year but takes into account a maximum depreciation limit. Once that limit is exceeded, the asset may be depreciated using the straight-line or another method.

3. One-off depreciation method

In this method the entire value of a tangible asset is depreciated in a single period, usually in its first year of use. This method is used when a tangible asset has a very short useful life or is treated as a one-off expense.

Different depreciation rates for accounting and tax purposes

The differences between the depreciation rates for accounting and tax purposes may lead to differences in accounting between the two areas. The main one is the different value of tangible assets for accounting and tax purposes. This triggers the need to calculate deferred tax on them and disclose it in the financial statements.

In case of any questions you may have with regard to depreciation of tangible assets, you are welcome to contact our experts.

Kontakt

Contact Person Picture

Joanna Biguszewska

Auditor (Poland)

Associate Partner

Send inquiry

Profile