At the beginning of this article it is worth first of all clarifying the difference between the lease of property under Section 7 and Section 9 of the Income Tax Act. Section 9 deals with the income from rent of a natural person that has not included the real estate in his business property, the real estate is therefore not used for business. Contrary to this, in Section 7 it is income from independent activities where the lessor has included the real estate in his business property. Income from rent taxed under Section 9 is not entered in the assessment base for social security and health insurance, unlike income taxed under Section 7. A reserve for tangible property repairs can be established by a taxpayer with income from rent under both Section 7 and Section 9.
The tax deductibility of these reserves is determined by several conditions. The first condition is the obligation to transfer funds to the full value of the reserve to a separate account. These funds can only be used for the purposes for which the reserve has been created. This condition applies to reserves for repairs that were first established in the 2009 tax period or later. This condition does not apply to earlier reserves.
When creating a reserve the acquisition of ownership rights must be followed. A reserve can only be created by an entity that has the ownership right to the subject of the reserve or by a tenant on the basis of a tenancy agreement, in which the commitment to carry out repairs is explicitly mentioned. Returning the property to its previous state or bringing it into a working state is considered a repair, so a repair does not mean technical improvements or modernisation. A technical reserve for repairs cannot be created in the case of tangible properties where the repairs are due to damage or other unforeseeable or unexpected event, or repairs that are regularly repeated each year. Nor can a reserve be created for a property whose depreciation period set by law is less than 5 years. A reserve must be created for at least longer than one tax period.
The creation of a reserve represents an increase in tax-deductible expenses (costs). The subsequent use, reduction or termination of a reserve reduces the tax expenses (costs). So a reserve for tangible property repairs in fact just means deferring a tax liability under the reserve is drawn and spreading the tax burden over time. So each person must individually assess the benefits of creating a reserve. The creation of a reserve could be advantageous in cases where a reduction of tax rates is expected.
Accounting units in the Czech Republic very often create a reserve for tangible property repairs in order to optimise the tax base. Given that reserves are considered an external source (i.e. commitments), care should be taken of the fact that the creation of such a reserve has an impact not only on the amount of assessed tax for the period, but also on the amount of the reserve itself which is also reflected in the amount of the reported debt and the trading income. These items will then affect the financial statement indicators and their explanatory power. From this perspective the creation of a reserve can have a negative effect.
Ing. Klára Bedrunková