Which Assets Can Be Depreciated and How?

Tax depreciation can play a significant role in optimizing expenses for tax purposes. But which assets can be depreciated, and who is entitled to claim depreciation?

In the Czech Republic, income taxpayers can apply so-called tax depreciation. However, it is important to distinguish between accounting depreciation and tax depreciation. While accounting depreciation reflects the actual wear and tear of an asset over time, tax depreciation allows taxpayers to reduce their tax base by gradually writing off the asset’s value.

What Is Considered a Tangible Asset?

The Income Tax Act defines what qualifies as tangible property. Tangible assets include individual movable items or groups of items that serve a distinct technical and economic purpose. To be classified as a tangible asset, the item’s acquisition cost must exceed CZK 80,000, and its useful life must be longer than one year.

Tangible assets also include buildings, houses, residential units, and subsequent structures, as well as units designated for growing permanent crops with a fruiting period of more than three years. Additionally, adult animals and groups of animals with an acquisition cost exceeding CZK 80,000 fall into this category.

Other tangible assets include technical improvements and expenses related to opening new sand quarries, provided these costs do not increase the initial or residual value of existing tangible assets. This category also covers technical reclamation, building rights (for taxpayers who are not accountants), and costs paid by the user that are included in the valuation of tangible assets under a financial lease, if those costs exceed CZK 80,000.

What Is Depreciation?

The Income Tax Act also defines the concept of depreciation. According to the Act, depreciation refers to the inclusion of the wear and tear of tangible assets – registered to the taxpayer and connected to generating taxable income – as part of the expenses (costs) incurred to obtain that income.

For an asset to be depreciated, it must be put into a condition suitable for normal use. Typically, this means completing the construction of the asset and fulfilling any technical requirements or other obligations set by specific legislation governing the use of such assets. The same principle applies to technical improvements.

Full and Partial Depreciation

To claim depreciation, the taxpayer must register the property he intends to depreciate by the end of the relevant tax year.

The law also allows for claiming half of the annual depreciation in certain cases. This applies if the property is registered at the beginning of the tax period, and also if, during that period, the property is disposed of, transferred to another legal entity or individual in accordance with special legislation, or if the business activity generating self-employment income or a lease is terminated.

Half of the annual depreciation also applies in cases such as dissolution without liquidation, corporate transformations, and other situations specified in § 26(7) of the Income Tax Act.

Obligation or Option to Apply Depreciation

Applying depreciation is not mandatory — it is up to the taxpayer to decide. Depreciation can also be paused, but if the taxpayer resumes depreciation later, it must continue as if there had been no interruption.

However, during the period when depreciation is paused, the taxpayer cannot apply the flat-rate expense method (used for self-employment or rental income). In such cases, depreciation is considered “accounted for” during the break, but it cannot be claimed as an expense for that period.

Which Assets Are Not Subject to Depreciation

The Income Tax Act also specifies certain assets that are excluded from depreciation. These assets are listed in Section 27 of the Act and include the following:

• Assets transferred free of charge under a financial lease agreement, if the acquisition cost does not exceed CZK 80,000
• Units of permanent crops with a fruiting period longer than three years that have not yet reached fruiting age
• Hydromelioration systems within two years of completion
• Works of art that are not part of buildings or structures
• Movable cultural monuments and collections of movable cultural monuments
• Tangible assets transferred gratuitously and by force under special legislation
• Inventory surpluses of tangible assets identified according to special legislation, if these were not included as income when identified
• Tangible movable property acquired by a creditor as a result of debt security through the transfer of rights – during the debt security period – provided that the original depreciator continues depreciation if they have entered into a loan agreement with the lender
• Tangible assets for which depreciation or similar foreign deductions are claimed by a person other than the depreciator under this Act, particularly if such assets are leased or subject to a financial lease
• Tangible property acquired as a gift, through a trust, or from a family foundation, where the acquisition was either exempt from income tax or not subject to taxation

Who Can Claim Depreciation?

Tangible property can only be depreciated by the depreciator (the taxpayer entitled to depreciate the asset). Importantly, only one taxpayer can depreciate a specific asset at any given time. The following entities are considered depreciators:

• The taxpayer who owns the property
• A state organization managing the property
• A local government organization or a voluntary association of municipalities, if the property has been transferred to them for management by the founding body
• A state cultural institution managing property transferred by its founder
• Other taxpayer organizations (non-legal entities) that include the property as part of their assets

If the taxpayer uses the property partially for generating taxable income, only the proportional part of the depreciation related to income generation can be claimed as an expense.

In the case of using a flat-rate expense method for vehicles, the taxpayer can only claim 80% of the depreciation cost.

A lessee may also claim depreciation on the property if entitled. Additionally, another taxpayer who is not the lessee but has received the property for use may claim depreciation — but only with the consent of the property owner.

Depreciation Groups

In the first year of depreciation, the taxpayer must classify the tangible asset into a depreciation group. These groups are listed in Appendix 1 of the Income Tax Act.

The Act defines six depreciation groups, each assigned a specific depreciation period ranging from three to fifty years.

The taxpayer then selects either straight-line or accelerated depreciation. Once chosen, the depreciation method cannot be changed during the asset’s depreciation period.

• Under straight-line depreciation, the same amount is depreciated each year.
• Under accelerated depreciation, a higher depreciation amount is claimed in the initial years, gradually decreasing over time.

The asset is depreciated until it reaches the initial acquisition cost or the adjusted increased cost.

There are also special depreciation rules for certain assets, such as sand quarries, technical reclamation, stamps, press molds, models, and templates. In these cases, depreciation is calculated to the day or month for greater accuracy.

Straight-Line and Accelerated Depreciation

Both straight-line and accelerated depreciation methods use specific rates and coefficients assigned to each depreciation group. These rates or coefficients differ between the first year of depreciation and the subsequent years, especially if the asset is used to increase production costs.

The calculated depreciation amount is rounded up to the nearest whole Czech crown.

Additionally, there is a new limitation for M1 vehicles (passenger cars). In this case, depreciation can only be calculated based on a maximum acquisition cost of CZK 2 million. However, certain exceptions to this rule may apply.

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