Fixed assets and its tax depreciation represent one of the important changes approved as part of the Tax Package in effect as of 1 January 2021. Bear in mind that the majority of these changes can be applied retroactively as of 1 January 2020 (i.e. voluntary retroactivity), which is why they can already impact 2020 accounting. This article’s aim is to elaborate on the relating issues.
For many years, we have been accustomed to the practice of depreciating for tax purposes all fixed assets with a purchase price of CZK 40 thousand and above. This threshold changes as of 1 January 2021 to CZK 80 thousand. This means that:
- Fixed assets with a value of up to CZK 80 thousand can be directly expensed (via account 501) as of 1 January 2021. However, this cannot be done in contradiction with an internal accounting directive. If such a directive stated that assets with a value of less than CZK 80 thousand should be recognized on the balance sheet, the accounting entity would first have to amend its internal accounting directive accordingly.
- For fixed assets with a value of up to CZK 80 thousand that an accounting entity purchases until 1 January 2021 and decides to recognize on the balance sheet despite the possibility to one-off expense them (this can occur for various reasons), accounting depreciation is directly effective for tax purposes. Tax depreciation need not be calculated separately. This is a category of the so-called small-value fixed assets.
- And now the important part: the stated rules can be applied for assets purchased as of 1 January 2020. However, this is voluntary, and every fixed asset can have its own treatment. In practice, this means that for assets with value between CZK 40 – 80 thousand put into use as of 1 January 2020 which are duly recognized on the balance sheet, we can decide whether to:
- Tax depreciate such assets and calculate the difference between accounting and tax depreciation;
- Treat the assets as small-value ones, and consider accounting depreciation as applicable for tax purposes as well.
- Assets put into use as of 1 January 2021 with a value of up to CZK 80 thousand can be:
- One-off expensed or
- Recognized on the balance sheet and treated as small-value assets.
- As of 1 January 2021, we can therefore encounter the following in a fixed assets register:
- Assets of more than CZK 40 thousand purchased in the period until 31 December 2019 which is depreciated for tax purposes and for which a difference between tax and accounting depreciation is calculated,
- Assets of up to CZK 80 thousand purchased as of 1 January 2021, which is depreciated for accounting purposes and the accounting depreciation is directly applicable for tax purposes,
- Assets with a value of between CZK 40-80 thousand put into use in the period of 1 January – 31 December 2020, for which either of the above two scenarios is possible,
- It goes without saying that a fixed asset register can also include assets with a value of less than CZK 40 thousand, which is depreciated for accounting purposes. This will probably not come as a surprise to anyone.
Intangible assets have also been subject to changes in rules. Until the end of 2020, intangible assets with a purchase price above CZK 60 thousand had to be recognized for tax purposes. As of 1 January 2021, the category of intangible assets has been abolished. What this means:
- Intangible assets can be directly expensed (typically via account 518) unless this is in contradiction with an internal accounting directive. In case of intangible assets of a higher value and/or long period of use, the recognition of expenses may have to be spread out over several periods (account 381).
- Intangible assets put into use until 31 December 2019 should be treated in the same way. Nothing changes and tax depreciation should be further determined (e.g. software is depreciated over 36 months etc.) and a difference between accounting and tax depreciation should be calculated.
- Intangible assets put into use as of 1 January 2021 which the accounting entity decides to recognize on the balance sheet are only depreciated for accounting purposes. These assets should therefore be treated in the same way as small-value intangible assets, even if their purchase price amounted to millions.
- What about intangible assets acquired in the period 1 January 2020 – 31 December 2020? We can decide freely and choose on a case-by-case basis.
- As of 1 January 2021, we will encounter the following in a fixed assets register:
- Intangible assets put into use until 31 December 2019 with a purchase price of more than CZK 60 thousand, for which we continue to calculate tax depreciation,
- Intangible assets put into use after 1 January 2021, for which no tax depreciation is available, and for which accounting depreciation is effective for tax purposes, regardless of their value,
- Intangible assets put into use in the period from 1 January 2020 – 31 December 2020, where we can choose from the above options,
- It goes without saying that intangible assets of up to CZK 60 thousand in value, purchased until 31 December 2019, is not subject to tax depreciation and its accounting depreciation is directly effective for tax purposes.
To be continued ..
Issues of extraordinary depreciation or of technical improvements are also worth considering, and we will look into them next.
Looking back in time
The last increase in the thresholds for recognition of fixed assets for tax purposes was made in the Income Taxes Act in 1998 i.e. more than 20 years ago. At that time, the threshold was increased from CZK 20 to 40 thousand. Before that, in 1996, the threshold was increased from CZK 10 thousand to CZK 20 thousand. Various transitional provisions of the Income Taxes Act amendments are still part of the full wording of the Income Taxes Acts published by the Sagit Publishing House (i.e. the so-called ÚZ editions). From this perspective, the increase of the threshold to CZK 80 thousand is no doubt economically justified and welcome by the taxpayers.
Intangible assets are also worth looking into in terms of their legislative history, as the current treatment for all practical purposes represents a return to the legislative treatment known from years 2001-2003.