Does an LLC Lose the Right to Tax Depreciation When Renting an Apartment to an Individual? — An Explanation
Renting an apartment to an individual for residential purposes does not preclude an enterprise from accruing tax depreciation if the real estate is used in business activities. The tax authorities have clarified the conditions under which a limited liability company may consider apartment depreciation when determining corporation tax and which provisions of the Tax Code of Ukraine apply.
When a leased apartment is subject to depreciation
Under subparagraph 134.1.1 of paragraph 134.1 of article 134 of the Tax Code of Ukraine, the object of corporation tax is profit from sources originating in Ukraine and abroad. This is determined by adjusting the financial result before taxation, as defined in the financial statements under national accounting standards or International Financial Reporting Standards (IFRS), by the differences stipulated in the Tax Code.
Differences related to the accrual of depreciation of non-current assets are defined by article 138 of the Tax Code.
According to subparagraphs 138.1 and 138.2 of article 138 of the Tax Code, the financial result before taxation is increased, in particular, by the amount of depreciation of fixed assets and intangible assets accrued according to accounting rules or IFRS, and decreased by the amount of depreciation calculated according to the rules of paragraph 138.3 of article 138 of the Tax Code.
How tax depreciation is calculated
The procedure for calculating depreciation to determine the taxable object is established by paragraph 138.3 of article 138 of the Tax Code.
According to subparagraph 138.3.1 of paragraph 138.3 of article 138 of the Tax Code, depreciation of fixed assets and intangible assets is calculated according to accounting rules or IFRS, taking into account the restrictions defined by the Tax Code. Depreciation methods provided by national accounting standards are applied.
For calculating tax depreciation, the cost of fixed assets and intangible assets is taken without considering their revaluation, impairment, or reappraisal conducted according to accounting rules.
Depreciation is also not accrued for periods when fixed assets are not used in business activities due to conservation.
Cases when depreciation is not applied
According to subparagraph 138.3.2 of paragraph 138.3 of article 138 of the Tax Code, expenses for the repair, reconstruction, modernisation, or other improvements of non-operating fixed assets and non-operating intangible assets are not subject to depreciation and are carried out at the expense of corresponding sources.
Non-operating fixed assets and intangible assets are considered assets not intended for use in the taxpayer's business activities.
Thus, for taxation purposes, depreciation of fixed assets is accrued only if they are used in the taxpayer's business activities.
Can an apartment rented to an individual be depreciated?
If a corporation tax payer uses an apartment as a fixed asset in its business activities and accrues depreciation on it in accounting, then renting such an apartment to an individual does not deprive them of the right to accrue tax depreciation.
Therefore, an LLC that rents an apartment to an individual for residential purposes within its business activities has the right to accrue tax depreciation for such a fixed asset in accordance with paragraph 138.3 of the Tax Code of Ukraine.
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