Depreciation is one of the most important elements of company accounting, as it spreads the cost of buying fixed assets over time. However, business owners often face a dilemma caused by the differences between accounting (balance-sheet) depreciation and tax depreciation. Although both types of depreciation concern the same asset, they can differ significantly in rates, periods and booking methods. Lower-value items follow separate rules, which we explain in our guide to depreciation of fixed assets up to PLN 10,000.
Understanding the differences between accounting and tax depreciation is key to keeping the accounting books correctly and to optimising the tax burden. Applying the right depreciation methods can affect the company's financial result and the amount of income tax payable.
Basic differences between accounting and tax depreciation
The main difference between accounting and tax depreciation lies in the source of the legal rules and the purpose they serve. Tax depreciation follows directly from the income tax acts and is mandatory, with the option of using certain tax preferences.
Tax depreciation is governed by the income tax acts and is used to determine tax-deductible costs for tax purposes. Depreciation rates and periods are set centrally by the legislator, which ensures that all taxpayers settle their taxes in a uniform way
Accounting depreciation, on the other hand, is governed by the Accounting Act (ustawa o rachunkowości) and is meant to reflect the actual period of economic usefulness of the fixed asset. The decision on the accounting depreciation rate rests with the head of the entity (kierownik jednostki), who should take into account the actual conditions in which the asset is used. The general principles behind the charges are set out in our article on the rules for depreciating business assets.
Article 32 section 2 of the Accounting Act lists five key factors that affect the accounting depreciation period. They include the number of work shifts, the pace of technical and economic progress, the asset's output capacity, legal restrictions and the expected residual value on liquidation
Differences in the approach to depreciation can lead to three basic situations in a company. The first is when tax and accounting depreciation proceed at the same pace and over the same period. The second concerns cases where accounting depreciation is faster than tax depreciation, which often happens in manufacturing companies that use machinery and equipment intensively.
The third possibility is when tax depreciation is faster than accounting depreciation, which may result from using tax preferences or higher depreciation rates for used fixed assets.
Accounting and tax depreciation over the same period
The most common solution in micro and small companies is to adopt identical accounting and tax depreciation rates. This approach greatly simplifies keeping the accounting books and removes the need to keep dual records of fixed assets.
The Accounting Act does not prohibit using the depreciation rates set out in tax law for accounting purposes. The head of the entity may adopt such rates if they consider that they reflect the actual period of economic usefulness of the fixed asset
Where the accounting and tax rates are the same, the monthly depreciation charge is booked in the standard way. The depreciation charge is posted to the debit side of account 40-1 "Depreciation" (Amortyzacja) and to the credit side of account 07 "Accumulated depreciation of fixed assets" (Umorzenie środka trwałego).
This solution is particularly popular with accounting firms serving small companies, where the priority is simple bookkeeping and minimising the risk of accounting errors. Identical depreciation rates also remove the need to create deferred income tax provisions and deferred tax assets.
Accounting depreciation faster than tax depreciation
In manufacturing companies, the actual useful life of a fixed asset is often shorter than tax law assumes. This applies in particular to machinery and equipment operated over several work shifts, which wear out faster in technical and economic terms.
Intensive use of production machinery over several work shifts can significantly shorten its period of economic usefulness. In such cases, accounting depreciation should reflect the actual period of use, even if it is shorter than the period provided for in tax law
When accounting depreciation is faster than tax depreciation, a temporary difference arises, which affects the company's tax settlements. The excess of the accounting charge over the tax charge cannot be treated as a tax-deductible cost, which increases the tax base.
Keeping records in such cases requires particular care and precision. You need to keep dual analytical records of fixed assets: one for accounting purposes under the Accounting Act and a separate one for income tax purposes.
Modern accounting systems usually provide for such situations in their fixed asset modules, allowing dual records to be kept automatically. Alternatively, you can adjust the accounting records on the group 4 accounts, separating depreciation that is a tax-deductible cost from depreciation that is not recognised for tax purposes.
The difference between accounting and tax depreciation is eliminated when the fixed asset is sold or liquidated, or fully depreciated for both accounting and tax purposes. That is also when the temporary differences are finally settled for tax purposes.
Tax depreciation faster than accounting depreciation
The opposite situation is when tax depreciation is faster than accounting depreciation. This is usually beneficial for liquidity, as depreciation charges can be treated as tax-deductible costs sooner.
Faster tax depreciation benefits business owners, as depreciation can be recognised as a tax-deductible cost earlier. This means a lower tax base in a shorter time and deferral of income tax payments
The most common reasons for faster tax depreciation are the tax preferences provided for in the income tax acts. One of them is one-off tax depreciation under de minimis aid for small taxpayers and taxpayers starting a business (up to the equivalent of EUR 50,000 per year), which allows a fixed asset to be written off in one go.
Another preference is higher depreciation rates for used fixed assets that were previously in use for at least 6 months. For example, the basic tax depreciation rate for cars is 20%, but for used vehicles it can be raised to 40%.
Booking the differences between tax and accounting depreciation requires special recording solutions. You can open off-balance-sheet account 90 "Difference between tax and accounting depreciation" and book on it the difference between the accounting and the tax charge.
Off-balance-sheet account 90 is used to record differences between tax and accounting depreciation. If the accounting system allows single-entry postings, the amount of the difference is recorded only on the debit side of this account
A practical example of depreciation differences
To better understand how the differences between accounting and tax depreciation work, it is worth analysing a specific numerical example. Let us assume that a company has bought a machine worth PLN 30,000, with an expected useful life of 7 years, which corresponds, rounded, to a rate of 14% per year.
At the same time, the depreciation rate for this machine under the income tax act is 20% per year, which means a depreciation period of 5 years. In this case, the monthly accounting depreciation charge will be PLN 350, while tax depreciation will be PLN 500 per month.
| Type of depreciation | Annual rate | Annual charge | Monthly charge | Depreciation period |
|---|---|---|---|---|
| Accounting | 14% | PLN 4,200 | PLN 350 | 7 years |
| Tax | 20% | PLN 6,000 | PLN 500 | 5 years |
| Difference | 6% | PLN 1,800 | PLN 150 | 2 years |
The monthly difference between tax and accounting depreciation is PLN 150, with tax depreciation being higher. Booking the monthly depreciation charge involves the standard entry of PLN 350 on the debit side of account 40-1 "Depreciation" and the same amount on the credit side of account 07 "Accumulated depreciation of fixed assets".
In addition, a separate accounting instruction can be used to record, for tax purposes, PLN 150 on the debit side of account 90 "Difference between tax and accounting depreciation". This entry allows the difference to be correctly reflected in the tax settlements.
Deferred income tax provisions
Where tax depreciation is faster than accounting depreciation, a taxable (positive) temporary difference arises, which requires a deferred income tax provision to be created under Article 37 of the Accounting Act.
A deferred income tax provision arises from taxable (positive) temporary differences between the accounting result and the tax result. It is calculated by multiplying the temporary difference by the income tax rate applicable when the difference reverses
The obligation to create deferred income tax provisions does not apply to all entities. Micro and small entities within the meaning of the Accounting Act may opt out of recognising deferred income tax assets and provisions (Article 37 section 10 of the Accounting Act).
The deferred income tax provision is released gradually as the temporary differences reverse. In the example above, once the tax depreciation of the machine ends after 5 years, the provision will be released gradually over the following 2 years.
Calculating and booking the deferred income tax provision correctly is essential for the reliability of the financial statements. The provision reflects future tax liabilities resulting from the different pace of depreciation.
Analytical records of fixed assets
Applying different accounting and tax depreciation rates requires well-organised analytical records of fixed assets. Each asset must be recorded with a breakdown into initial value, accounting accumulated depreciation and tax accumulated depreciation.
Modern accounting systems offer advanced fixed asset modules that automatically calculate depreciation charges at different rates and generate the relevant accounting entries. These systems also produce summaries for tax and reporting purposes automatically.
If you do not have suitable software, you need to keep additional off-book records that allow you to monitor the differences between accounting and tax depreciation. These records should contain information on:
- The initial value of the fixed asset
- The date depreciation starts
- The accounting and tax depreciation rates
- The monthly depreciation charges
- Accumulated accounting and tax depreciation
- Temporary differences
Analytical records of fixed assets must make it possible to check that depreciation is calculated correctly and to track the differences between accounting and tax depreciation. It is particularly important to record the dates on which depreciation starts and ends for each purpose
Impact on financial reporting
Differences between accounting and tax depreciation directly affect the company's financial reporting. The balance sheet shows both the net value of fixed assets based on accounting depreciation and the deferred income tax provisions or assets.
The profit and loss account presents depreciation charges at accounting rates, while the differences between accounting and tax depreciation affect the amount of current and deferred income tax.
Information on depreciation differences should also be disclosed in the additional information and notes to the financial statements. It is particularly important to present the accounting policy on depreciation and to explain the reasons for the differences between accounting and tax depreciation.
Tax optimisation through depreciation
Deliberate use of the differences between accounting and tax depreciation can be part of a company's tax optimisation strategy. Faster tax depreciation defers income tax payments, which improves liquidity.
Business owners can use various tax preferences that speed up tax depreciation. They include:
- One-off depreciation under de minimis aid
- Higher rates for used fixed assets
- Increased rates for fixed assets used more intensively, in worse conditions or in municipalities with high unemployment
- One-off depreciation of brand-new fixed assets up to PLN 100,000 per year and increased rates for machinery subject to rapid technical progress
Using tax preferences for depreciation requires meeting certain conditions and keeping appropriate documentation. Business owners should monitor changes in tax law regularly so as not to lose the opportunity to use favourable solutions
Depreciation planning should be part of the company's wider tax strategy, taking into account forecast financial results and investment needs. Managing depreciation well can help optimise the tax burden while keeping the settlements correct.
Checking and verifying settlements
Keeping accounting and tax depreciation correctly requires regular checks and verification of the settlements. Business owners should systematically check:
- That depreciation rates comply with the law
- That monthly charges are calculated correctly
- That fixed asset records are complete
- That accounting data are consistent with tax data
- That deferred tax provisions are created correctly
Checks should also cover verifying that the conditions for using tax preferences are met and monitoring the periods in which they apply. Depreciation errors can lead to serious tax and financial consequences.
A manufacturing company applied an incorrect tax depreciation rate to a production line for several years, which was discovered during a tax inspection. As a result, it had to pay the additional tax together with interest and penalties for a period of three years, which significantly affected the company's financial position.
Regular internal checks and cooperation with an experienced accounting firm can help avoid such problems. It is also worth using the services of tax advisers when planning larger investments in fixed assets.
