Fiscal and tax treatment of the renovation cost of the rented house

If the decoration expenses incurred by the enterprise in renting a house can be fully deducted if the enterprise has both general tax calculation and simple tax calculation? How to account for renovation costs? How to deduct the renovation fee before tax?

In terms of VAT deduction, in accordance with the "Implementation Measures for the Pilot Project of Replacing Business Tax with Value-Added Tax" (Annex 1 of CS [2016] No. 36) and the Notice of the Ministry of Finance and the State Administration of Taxation on VAT Policies such as Deduction of Input Tax on Leased Fixed Assets (CS [2017] No. 90) and other documents, taxpayers purchase fixed assets, intangible assets (excluding other equity intangible assets), immovable property and leased fixed assets and immovable property are used for both general and simple tax calculation methods, value-added tax exemption items, collective welfare or personal consumption, the input tax is allowed to be fully deducted from the output tax. The input VAT allowed to be fully deducted under the above-mentioned policies refers to the input VAT obtained from the purchase of fixed assets, intangible assets (excluding other equity intangible assets), immovable property and leased fixed assets and immovable property, excluding the input tax corresponding to various expenses such as decoration fees, heating fees, property fees, maintenance fees and other expenses paid after the purchase or lease of relevant assets. Therefore, the input of the decoration fee cannot be fully deducted. Non-deductible input tax = all input tax that cannot be divided in the current period× (sales of taxable items under the simplified tax calculation method for the current period + sales amount of VAT exempt items) ÷ total sales amount of the current period. The in-charge tax authorities may, in accordance with the above formula, liquidate the non-deductible input VAT based on the annual data.

In terms of accounting treatment, after the implementation of the new lease standard, lessees no longer distinguish between operating leases and financial leases, and are required to recognize "right-of-use assets" except for short-term leases and low-value leases. According to the new lease standard, the right-of-use asset shall be initially measured according to the cost, which includes the initial measurement amount of the lease liability, the initial direct cost, the recovery cost, etc., and the initial direct cost refers to the incremental cost incurred to achieve the lease. Incremental costs refer to costs that would not have been incurred if the business had not acquired the lease, such as commissions, stamp duty, etc. The decoration cost of the leased house does not fall within the scope of the cost of the above-mentioned right-of-use assets, and shall be recorded in the accounting of relevant assets or costs according to the type of decoration or the purpose of the asset, such as "long-term amortized expenses", "fixed assets", "management expenses" and other accounting accounts, which are consistent with the provisions before the implementation of the new lease standards. The "Guide to the Application of Accounting Standards for Business Enterprises: Accounting Subjects and Main Accounting Treatment" stipulates that long-term amortized expenses are accounted for various expenses with an amortization period of more than one year that have been incurred by the enterprise but should be borne by the current period and subsequent periods, such as the improvement expenses incurred by the fixed assets leased in the form of operating leases. The Accounting Standards for Business Enterprises require enterprises to make the necessary professional judgments on their own, and are less binding or have no specific restrictions on the proportion and extension of the period. However, the daily repair costs, major repair costs and other expenses only ensure the normal working condition of the fixed assets, and it does not lead to the change of the performance of the fixed assets or the increase of the future economic benefits of the fixed assets. Therefore, it should be directly charged to the current expense in a lump sum when incurred.

1. Rental housing incurs improvement expenditures

Borrow: Long-term amortized expenses

Tax Payable - VAT Payable (Input Tax) (if any, deductible)

Credit: bank deposits, etc

2. Amortized over the term of the lease

Borrow: management fees, etc

Credit: Long-term amortized expenses

In terms of pre-tax deduction of enterprise income tax, Article 13 of the Enterprise Income Tax Law stipulates that when calculating the taxable income, the following expenses incurred by an enterprise are allowed to be deducted as long-term amortized expenses and amortized in accordance with the regulations: (1) the reconstruction expenses of fixed assets for which depreciation has been fully withdrawn; (2) Expenses for the renovation of leased fixed assets; (3) Expenditures for major repairs of fixed assets; (4) Other expenses that should be treated as long-term amortized expenses. Article 68 of the Regulations for the Implementation of the Enterprise Income Tax Law stipulates that the expenses for the reconstruction of fixed assets referred to in Items (1) and (2) of Article 13 of the Enterprise Income Tax Law refer to the expenses incurred in changing the structure of houses or buildings and extending the service life. The expenses specified in Item (1) of Article 13 of the Enterprise Income Tax Law shall be amortized in installments according to the estimated useful life of the fixed assets; The expenses specified in subparagraph (2) shall be amortized in installments according to the remaining lease term as agreed in the contract. If the service life of the reconstructed fixed assets is extended, the depreciation period shall be appropriately extended except for the provisions of Article 13 (1) and (2) of the Enterprise Income Tax Law. Article 69 stipulates that the expenditure on major repair of fixed assets referred to in Item (3) of Article 13 of the Enterprise Income Tax Law refers to the expenditure that meets the following conditions at the same time: (1) the repair expenditure reaches more than 50% of the tax base at the time of acquisition of fixed assets; (2) The service life of fixed assets after repair is extended by more than 2 years. The expenses specified in Item (3) of Article 13 of the Enterprise Income Tax Law shall be amortized in installments according to the remaining useful life of the fixed assets. Article 70 stipulates that other expenses that should be treated as long-term amortized expenses as mentioned in Item (4) of Article 13 of the Enterprise Income Tax Law shall be amortized in installments starting from the month following the month in which the expenditure is incurred, and the amortization period shall not be less than 3 years.

According to the above provisions, the decoration expenses incurred by enterprises renting houses should be divided into reconstruction expenses and other expenses that should be used as long-term amortized expenses, and Article 68 of the "Regulations for the Implementation of the Enterprise Income Tax Law" has clearly defined the reconstruction expenditures, and the reconstruction expenses must meet two conditions: 1. The structure of the house has been changed; 2. Extend the service life of the house. The renovation of the rented house does not change the structure of the house, nor does it extend the service life of the house, and does not meet the provisions on the expenditure on the renovation of rented fixed assets. In terms of enterprise income tax, is the decoration expenditure that does not meet the conditions for renovation expenditure regarded as "long-term amortized expense"? There is no explicit regulation at this time. For the sake of prudence, in terms of corporate income tax, the larger amount is regarded as "long-term amortized expense".

There is a difference in the pre-tax deduction of enterprise income tax for reconstruction expenses and other long-term amortized expenses: "reconstruction expenses" are amortized in installments according to the remaining lease term agreed in the contract, and if the remaining lease term is less than 3 years, the amortization deduction according to the actual lease term is also in line with the provisions of the tax law, and there is no need to make tax adjustment. "Other expenses that should be treated as long-term amortized expenses" shall be amortized in installments starting from the month following the month in which the expenditure is incurred, and the amortization period shall not be less than 3 years. It is only a daily sporadic repair, and the direct expense treatment is a one-time pre-tax deduction in the current period.

Author: Zhong Yan Source/Unit: Zhonghui Wuhan Tax Agent Office Shiyan Office