Whether the security deposit is a tax cost
The guarantee deposit operates mainly under a leasing contract. According to the adopted definition, it is a fee that the lessee pays the lessor to secure claims related to the non-performance or improper performance of the lease contract by the lessee.Depending on the provisions of the contract, this fee may be paid at the beginning, at the end or systematically during the leasing period along with the leasing installments. The issue of whether the lessee's expenses on the guarantee deposit can be classified as tax deductible costs requires an analysis.
The nature of the guarantee deposit
As has already been mentioned, the essence of introducing a guarantee deposit is to secure the interests of the lessor. This is because a guarantee deposit is a type of a collected deposit, from which, in the event of improper performance of the contract by the lessee, the leased object is covered. However, if the entire contract is performed in accordance with its content, the deposit is fully refunded.
Guarantee deposit in the light of tax deductible costs
In the light of the applicable regulations, the guarantee deposit cannot be considered a tax deductible cost. Tax costs are costs incurred in order to achieve income or to maintain or secure a source of income. The deposit can certainly be considered revenue related. It is obvious that the fact of granting it may affect the conclusion of a specific contract, thus having an impact on obtaining revenues.
However, it should be noted that the provision of a deposit cannot be treated as an expense. An incurred expense is an expense that is definitely incurred at the expense of the entity's assets. As a deposit is inherently returnable, it cannot be treated as an expenditure incurred. Hence, the deposit cannot be considered a incurred cost.
As rightly pointed out by the Supreme Administrative Court in the judgment of 20 March 1996, SA / Ka 332/95, only definitive expenses which cannot be reimbursed may be recognized as tax deductible costs. A deposit is a service indifferent from the point of view of the tax obligation in personal income tax.
A similar position regarding the deposit was expressed by the Supreme Administrative Court in the judgment of 20 May 1997, I SA / Ka 15/96, where we read: The expenditure on paying the deposit cannot be considered a tax-deductible cost due to its returnable nature. It must be consistently pointed out that if the deposit was considered a tax deductible cost, its return would be taxable income. The tax authorities rightly concluded that the deposit is a benefit that does not affect the tax obligation in any way, and therefore is tax neutral.
The taxpayer concluded a lease agreement under which a guarantee deposit was established in the amount of PLN 3,000, payable at the beginning. The lease contract was properly performed and the lessor returned the entire amount of the deposit. It is not a tax deductible cost for the taxpayer.
The taxpayer concluded a leasing agreement under which a guarantee deposit was established in the amount of PLN 3,000, payable at the beginning. After a year, he broke the contract through his own fault. The guarantee deposit was withheld by the lessor, which resulted in the fact that this amount could be recognized as a tax deductible expense.
By the way, it is also worth emphasizing that the guarantee deposit does not constitute income for the lessor at the time of its receipt. It is then not yet the amount due. The moment when the income from the guarantee deposit arises depends on the content of specific contractual provisions establishing the deposit. The content of these contractual provisions will indicate when the entitled person will be able to satisfy himself from the deposit, and thus when the claim will be due, becoming the amount due. Therefore, a possible recognition of the deposit as income can only be considered if it is the definitively received amount.
The moment when the guarantee deposit is recognized as a tax cost
It was indicated that the guarantee deposit cannot be classified as tax deductible costs at the time of its establishment. At this point, it is not yet certain whether the property loss due to the other party's retention of the deposit will arise. The expense is therefore not yet incurred. As stated by the Supreme Administrative Court in the judgment of September 15, 1999, III SA 5389/98: security is the so-called a guarantee deposit, which is not included in the tax deductible costs on the day it is established.
However, upon its settlement and actual use by the counterparty, the guarantee deposit becomes a tax-deductible cost. Then it is an expense incurred.
It is worth quoting here the judgment of the Supreme Administrative Court of 10 December 1997, I SA / Gd 409/96. Although this ruling concerns the guarantee deposit, its theses can also be applied to the deposit: The essence of the guarantee deposit is to secure the repair of defective services and it is subject to settlement after the period for which it was granted. On the other hand, the guarantee deposit used to remove defects in the delivered goods and services is tax-deductible in the tax year in which these defects were actually removed, thus reducing the tax base.