Is the deposit a tax expense?


Payment of an advance for a future delivery of goods or services, documented with an advance invoice, gives rise to a deduction of VAT. The seller is obliged to prove the output tax, and the customer has the right to deduct input VAT. In income tax, the advance payment is not recognized as an expense. The customer will be able to include the purchase value in tax costs only after receiving the final invoice. Do the same rules apply to the deposit?

What is a deposit?

The deposit serves as a security for the proper performance of the contract. It is therefore a guarantee in the event of failure of one party to fulfill the contract. However, it is not part of the price and, above all, is of a returnable nature. Therefore, it is not the same concept as an advance payment (as long as the nature of the paid deposit is not changed by the parties to the contract). It will also be treated differently than the advance payment in terms of tax settlements.

Contract guarantee and VAT

As the deposit is returnable, it does not give rise to a VAT obligation. The entrepreneur paying it will not be able to deduct VAT from the value of the deposit. First of all, for the payment of the deposit, he will not receive a VAT invoice, as is the case with the advance payment. Only if the parties to the contract decided that the paid performance guarantee would be counted towards the principal amount due for the goods or service, and therefore somehow included in the price, should it be treated for tax purposes as an advance payment. The seller should then document the receipt of the payment with an advance invoice, which would also entitle the buyer to deduct VAT.

Deposit and tax cost

Also, in the case of income tax settlements, the deposit paid for a given contract cannot be treated by the customer as a tax expense. An example of a deposit can be a deposit. It is usually returnable and is not recognized in revenues or costs of an entrepreneur conducting simplified accounting. It is true that the deposit was not directly mentioned in the wording of Art. 23 of the Personal Income Tax Act, which says about expenses that do not constitute a tax cost, but due to the fact that it is, in principle, a refundable receivable - it should not be considered a tax deductible cost.

The entrepreneur should therefore distinguish the nature of the payment made before receiving the goods or purchasing the service - whether it is a deposit or an advance payment. This is because their settlement for tax purposes will depend on this. While in the case of a deposit payment, the event will not be recorded in the KPiR or VAT register, even if the prepayment is an advance payment, it already causes tax consequences.