Depreciation is the reduction in the value of property, plant, and equipment over time as a result of their use. Charging of depreciation means the recovery of invested capital, by the gradual sale of the asset. Depreciation is charged at the end of the accounting year using the best method for the appropriate asset.
Depreciation rate it is a percentage determination of what part of the value of a given asset can be accounted for during the year. "The choice of depreciation rates has also been included by the requirements of tax law and regulation." (D. R. Carmichael, Lynford Graham, 2009, s.156). In Polish law, the rate can be found in the Act on Personal Income Tax in the List of Annual Depreciation Rates. And so in the case of e.g.
- non-residential building - the rate is 1.5%,
- car - the rate is 20%,
- computer teams - the rate is 30%.
Determining the depreciation rate with the straight-line method
„The depreciation rate (in percentage terms) may also be determined by dividing the specified declining-balance percentage (150 percent or 200 percent) by the applicable recovery period.
A depreciation rate based on the straight-line method is used beginning in the tax year in which the depreciation deduction is greater than the depreciation deduction that would result using the 150-percent or 200-percent declining-balance method (whichever is applicable for the property).” (CCH Tax Law Editors, 2007, s.300)
Group and composite rates
For depreciation of asset groups, maybe depreciation at a single rate can be used. These groups include the assets of electrical utilities and hotels. The group depreciation method and the collective depreciation method are the most commonly used depreciation methods. Group depreciation is defined as the "process of averaging the economic lives of a number of plant assets and computing depreciation on the entire class of assets as if it were an operating unit. […] Because the accumulated depreciation account under the group procedure applies to the entire group of assets, it is not related to any specific assets. Thus, no book value can be calculated for any specific asset and there are no fully depreciation assets. To arrive at the periodic depreciation charge, the depreciation rate is applied to the recorded cost of all assets remaining in service, regardless of age.” (D. R. Carmichael, Lynford Graham, 2009, s.156)
Application of the MACRS (Modified Accelerated Cost Recovery System) table
„When the optional MACRS rate tables are used, the percentages from the tables are applied to an asset's unadjusted basis, as determined for the year the property is first placed in service, to compute the depreciation deduction. That figure is used for each tax year that the MACRS rate tables are used for that property. If the taxpayer discontinues using the MACRS rate tables, then the unrecovered basis must be determined for the year of the change and for each year thereafter to compute the MACRS depreciation deduction.” (Bruce K. Benesh, M. Kevin Bryant, 2019, s.82)
„Special rules apply to MACRS deductions in tax year of less than 12 months (a short tax year). [...] A special set of rules applies in calculating the MACRS deductions in tax years consisting of less than 12 months ("a short tax year"). The optional MACRS rate tables provided by the Service cannot be used. The depreciation allowance is determined in a short tax year by:
- multiplying the taxpayers property's basis in the property by the applicable depreciation rate; and
- the multiplying that number by a faction, the numerator of which is the number of months (including fractions of months) the property is deemed in service during the short tax year under the applicable convention and the denominator of which is 12” (Bruce K. Benesh, M. Kevin Bryant, 2019, s.104)
- Benesh B. K., Bryant M. K. (2019), Depreciation Handbook, LexisNexis, New York
- Carmichael D. R., Graham L. (2009), Accountants' Handbook, John Wiley & Sons, Inc., New Jersey
- CCH Tax Law Editors (2007), U.S. Master Depreciation Guide 2008, CCH a Wolters Kluwer business, Chicago
Author: Weronika Chudzik