Financing business activities - where to get the funds?

Service Business

When starting their own business, not each of the potential entrepreneurs has the resources needed to run it at the very beginning. Business financing is at the heart of the company's bloodstream. Entrepreneurs already operating on the market often face problems related to the lack of capital for development. Therefore, there are institutions on the market that help entrepreneurs to raise capital in order to open or develop their business. One-person business owners who already manage to raise capital should know how such an event affects tax issues, and therefore the company's accounting. Read the article below and find out what are the sources for financing a business.

Financing of activities through loans

The traditional source for financing business activity is credit. When acquiring it, the entrepreneur shows no income or cost. Only when the purchase of a given good, company property or service related to the business is financed with the funds from the business loan, the cost will be posted on the basis of the purchase invoice. Thus, when posting a purchase, it does not matter that it has been financed with a loan. In addition, however, apart from including the actual purchase price of a given good or property in the cost, the entrepreneur will also be able to recognize the interest charged on the loan as the cost. The condition is, however, that they are paid, because only such are included in tax costs. Confirmation of their payment may be a bank statement or proof of payment.

An important issue in crediting the company's fixed assets is the loan agreement. It may contain a provision that the bank becomes, in a certain percentage (usually 49%), a co-owner of a given item. For an entrepreneur, this means that he cannot make depreciation write-offs from the general value of a fixed asset, but only from the one he is the owner of (usually 51%). Lending, however, does not affect the inclusion of expenses related to the operation of the purchased item or its insurance as costs.

Financing of activities through leasing

Acquiring capital is not limited to acquiring money itself. Often, entrepreneurs need equipment or the very place where the activity could be conducted. Here, one of the most common forms of financing activities is leasing. Both movables and land or real estate can be leased. Recognition of leasing in costs will depend on the type of leasing, because in practice two types of contracts are distinguished: operating leasing and financial leasing.

Operating lease

Operating lease - the leased item remains the property of the leasing company throughout the leasing period, and the entrepreneur cannot enter it into the company's fixed assets register and deduct depreciation.

The costs in the operating lease will be:

  • leasing installments (most often with interest already charged);
  • initial rent, also known as initial payment;
  • expenses related to the use of the leased asset;
  • insurance.

Financial leasing

Financial leasing - here the leased item is usually owned by the entrepreneur from the beginning of the leasing contract. The difference, then, is what constitutes the basis of the cost calculation. Unlike operating leasing, individual leasing installments will not be posted to the KPiR, but tax deductible costs will be:

  • depreciation write-offs (because the leased item will constitute a fixed asset in the company);
  • interest part of the leasing installment;
  • expenses related to the use of the leased asset;
  • insurance.

Financing of activities through subsidies

Establishing activities also have the option of using aid granted from the state budget or EU funds. The received non-returnable subsidies are income, but are tax-exempt. This issue is regulated by the Personal Income Tax Act (Article 21). Therefore, an entrepreneur benefiting from a subsidy is not required to present the funds received as income from operations and to pay income tax. However, on the other hand, it means that the items purchased with a subsidy will not be treated as a tax expense. Thus, an entrepreneur buying equipment from subsidies (e.g. machines constituting a fixed asset) will not be able to include the purchased equipment in the costs (depreciation charges will not constitute a tax cost). The same will be the case for the purchase of goods financed by a subsidy. Despite the fact that the entrepreneur receives an invoice for the purchase of goods, he will not enter it as a tax expense.

The only exception to the general rule stating that the received subsidies do not constitute the company's income and the expenses financed with them are not a tax cost, is the receipt of subsidies from the Labor Fund (one-time aid for the unemployed to start a business). This subsidy was included in the act as tax-exempt income, but the expenses financed with it were not excluded from costs. Therefore, this form of subsidy is an exception for accounting purposes - the taxpayer may include in the costs the purchase of goods or services financed with funds from the subsidy. However, this exception does not apply to fixed assets purchased from subsidies, the depreciation of which, in this case, will not constitute a tax cost.

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Other ways to finance your business

It is difficult to obtain funds for novice entrepreneurs who often do not have creditworthiness. It happens that they are excluded as borrowers from the very beginning. Then they can apply for a loan from the so-called social initiatives, usually linked to EU aid. The entrepreneur does not treat such a returnable loan as a subsidy, but settles the purchase financed with the loan similarly to the loan. Therefore, the loan does not constitute direct income for the entrepreneur.

It will be different when the entrepreneur receives a refund from the Labor Office, related to, for example, the organization of intervention works. Then, the funds received (as a partial reimbursement of costs incurred) will constitute the entrepreneur's remaining revenues subject to income tax.

As you can see, it is extremely important what kind of help the entrepreneur uses. This affects the size of the benefits achieved and the correctness of accounting settlements that no entrepreneur can avoid.