Income tax laws provide for various methods of depreciation for fixed assets and intangible assets. The basic method is the straight-line method. Using this method, the taxpayer makes a depreciation write-off in the same amount each settlement period. With the straight-line method, the taxpayer has the right to determine the depreciation rate, provided that it cannot exceed the maximum rate specified in the law. Whether the rate is increased or decreased in subsequent periods, the depreciation amount remains unchanged.
Higher depreciation rates increase tax deductible costs and therefore reduce the tax payable. However, their use shortens the depreciation period. Lower rates are beneficial when incurring a loss, as they allow for depreciation over a longer period and for increasing the rate after recovering from the loss. However, is it possible to adjust previously applied depreciation rates? This issue was the subject of disputes with the tax authorities. They argued that taxpayers can reduce depreciation rates using the straight-line method starting from the month following the month in which the fixed assets were entered into the records or from the first month of the following tax year. The word "next" should be understood as each subsequent tax year after the current tax year. This position was also presented in the individual tax ruling of December 8, 2017, No. 0114-KDIP2-2.4010.222.2017.1.SO, addressing the question of whether it is possible to reduce depreciation rates through an adjustment for years for which the tax liability has not expired. The applicant disagreed with the authority's interpretation and appealed the ruling to the administrative court.
The Provincial Administrative Court in Warsaw found the tax authority's position to be incorrect. It interpreted the provision regarding the possibility of reducing depreciation rates, i.e., Article 16i, Section 5 of the Corporate Income Tax Act, as linguistically appropriate. It pointed out that this provision specifies the starting date for applying amended depreciation rates. However, the provision does not address the timing of a "technical" rate change—when a rate reduction can be implemented in tax records—or whether this change can apply only to future periods. Therefore, the court found that it is possible to reduce the depreciation rate for previous years, taking into account the statute of limitations on tax liabilities.
The interpretative body filed a cassation appeal against the above judgment. However, the Supreme Administrative Court shared the view of the Provincial Administrative Court in Warsaw and dismissed the cassation appeal. It found that due to the imprecise wording of the provision, its wording should be deemed to allow income tax payers to change depreciation rates for both future and past tax returns. However, pursuant to Article 81 § 1 of the Tax Ordinance, taxpayers may correct a previous self-assessment of tax. The right to correct a return is limited by the statute of limitations on the tax liability.
The ability to reduce depreciation rates for past periods is a beneficial solution for businesses experiencing long-term losses. It allows for depreciation to be spread out over time. In the case of a long-term loss, a fixed asset may be depreciated before the taxpayer earns income. This would prevent the taxpayer from realizing the benefits of depreciation. Adjusting the rate by reducing it helps prevent this situation.
This article is for informational purposes only and does not constitute legal advice.
