How to account for the use of cars for business purposes?
The use of cars in taxpayers' business causes many complications. The division into passenger cars and other vehicles is of fundamental importance for the correctness of the settlements. The expenses for the operation of passenger cars are limited. Expenses for this purpose may be included in tax deductible costs only up to the amount resulting from the multiplication of the number of kilometers of the actual mileage of the vehicle for the taxpayer's purposes (documented in the vehicle mileage register) and the rate for one kilometer of mileage (specified in separate regulations). The expenses for the use of other cars are not subject to any restrictions and are fully tax-deductible.
Expenses related to the operation of vehicles that are fixed assets in the company are posted directly to tax deductible costs on the basis of documents (invoices, bills) confirming their incurrence. On the other hand, expenses for the use of cars not classified as fixed assets in the company are settled on slightly different principles.
Definition of a passenger car
The provisions of the Personal Income Tax Act define a passenger car as a motor vehicle with a maximum permissible weight not exceeding 3.5 tons, structurally designed for the transport of no more than nine people, including the driver.
Definition of a truck
A truck will be:
- a motor vehicle with one row of seats, separated from the part intended for the carriage of goods by a wall or a permanent partition, classified on the basis of road traffic regulations into the following sub-type: multi-purpose, van;
- a motor vehicle with more than one row of seats which are separated from the part intended for the carriage of goods by a wall or a permanent partition, and whose length of the part intended for the carriage of goods, measured on the floor from the farthest point of the floor allowing the erection of a vertical wall or a permanent partition between the floor and the ceiling to the rear edge of the floor, exceeds 50 percent. vehicle length; for the calculation of the proportion referred to in the preceding sentence, the length of the vehicle is the distance between the lower edge of the vehicle's windscreen and the rear edge of the floor of the cargo section of the vehicle, measured horizontally along the length of the vehicle between the lower edge of the vehicle's windscreen and a point derived vertically from the rear edge of the floor of the load carrying part of the vehicle;
- a motor vehicle that has an open part intended for the carriage of loads;
- a motor vehicle that has a driver's cabin and a body intended for the carriage of loads as structurally separate elements of the vehicle;
- a motor vehicle which is a special vehicle within the meaning of the provisions of the road traffic law with the intended uses listed in Annex 9 to the VAT Act, i.e.: electric aggregate, welding aggregate, bank truck, for drilling works, excavator, excavator, loader, road cleaning, work jack maintenance and assembly, roadside assistance, winter road maintenance, truck crane, funeral home.
In the case of motor vehicles with a permissible total weight not exceeding 3.5 tons, the fulfillment of the requirements set out in the PIT Act, which allows the vehicle not to be classified as passenger cars, is determined on the basis of an additional technical examination. The test must be carried out by a district vehicle inspection station and confirmed with a certificate issued by this station, and the vehicle registration certificate should contain an appropriate note that the above-mentioned requirements have been met (VAT-1).
The certificate confirming the technical inspection, the taxpayer is obliged to deliver to the competent head of the tax office within 14 days from the date of its receipt.
Use of a private car
Restrictions on recognizing as tax deductible costs expenses related to the use of cars considered personal by the regulations as part of business activity exist when the car is not bought for a company, but is owned by the entrepreneur or its employee, or is used for any other reason in business . Expenses related to the use of a passenger car in business activities, not entered into the register of fixed assets, constitute tax deductible costs only up to the limit, determined on the basis of the data contained in the register of vehicle mileage, the so-called kilometers. Such expenses should be considered, inter alia, expenses related to the normal use of the car, i.e. the cost of fuel, replacement of spare parts, ongoing repairs and repairs. These expenses can be classified as tax deductible costs up to the amount of kilometers.
The person using the vehicle is obliged to keep records of the vehicle mileage. In the absence of records, the expenses incurred by the taxpayer for the use of cars for business purposes do not constitute a tax deductible cost (tax cost). Of course, the car may be used by the entrepreneur's employee. Then the employee will be responsible for keeping records. The records kept by the employee will be the basis for the entrepreneur to include the above-mentioned expenses in the costs.
The provisions of the PIT Act show that the expenses incurred for the benefit of employees due to the use of cars by them for the purposes of their activity are not tax costs:
- in order to make a business trip (long distance driving) in the amount exceeding the amount determined using the rates for one kilometer of the vehicle mileage;
- in local trips - in the amount exceeding the amount of the monthly lump sum or in the amount exceeding the rates for one kilometer of the vehicle mileage, specified in separate regulations issued by the competent minister.
The mileage of the vehicle, with the exception of the lump sum, should be documented in the vehicle mileage record confirmed by the taxpayer at the end of each month. The person using this vehicle is obliged to drive the mileage. In the absence of such records, the expenses incurred by the taxpayer for the use of cars for the taxpayer's needs will not constitute a tax deductible cost.
How to make depreciation write-offs?
- Determine the period of use of the car. It should be longer than a year. Then the taxpayer may consider the car as a fixed asset.
- Enter the fixed asset in the record. After recognizing the car as a fixed asset, it should be entered in the register of fixed assets and intangible assets.
- Determine the starting value. Its correct determination depends on the method of purchasing the car. This value will be determined differently in the case of buying a car, otherwise in the case of inheritance or donation, and otherwise in the case of a partially paid purchase.
- Choose the correct depreciation rate. The taxpayer must determine the depreciation rate from the list constituting an appendix to the Income Tax Act. This rate may be increased. The taxpayer may also shorten the amortization period.
Documenting incurred expenses
In the settlement of the so-called mileage it is extremely important that invoices documenting purchases related to the use of a private car include the car's registration number. It should be remembered that the vehicle mileage register is used only to determine the limit of expenses related to the use of a private passenger car in business activities, above which the expenses are no longer tax deductible. It is not, however, proof of actual expenditure on fuel, oils, lubricants, ongoing repairs or other expenses related to the day-to-day operation of the vehicle. Evidence of incurring these expenses are invoices containing the vehicle registration number.
Expenses for the use of a passenger car not entered into the register of fixed assets should be entered in column 13 of the tax book of revenues and expenses after the end of the month on the basis of a monthly statement of expenses resulting from invoices containing the registration number of this vehicle. The sum of expenses classified as tax deductible costs in individual months, determined from the beginning of the tax year, may not exceed the amount resulting from the multiplication of the number of kilometers of the actual mileage of the vehicle and the rate for one kilometer of mileage. In the event that the amount resulting from the monthly statement of invoices relating to the operation of the car is higher than the amount resulting from the vehicle mileage record, the tax deductible cost is the amount resulting from the records and booked in col. 13 of the tax revenue and expense ledger. The difference between the amount resulting from the monthly statement of expenses incurred (resulting from bills) and the amount resulting from the vehicle mileage register is subject to settlement (i.e. it is taken into account during the settlement) in the following month. Any excess costs will be deducted in the following months of the year, provided, of course, that the opposite situation occurs then; the multiplication of the number of kilometers traveled by the rate applicable at that time per 1 km will result in more than the actual expenses incurred in a given month. But if by the end of the year there is no such situation that the amount actually spent will be lower than that indicated in the vehicle mileage register, it will not be possible to include such a surplus in the costs of business activity. The costs are entered in the book at the end of the month.We can do it in two ways - either directly, on the basis of the vehicle mileage record, or through an internal ID prepared on the basis of an entry from the vehicle mileage record.
Using the car for private purposes
It is perfectly normal to use company cars (company cars assigned to an employee) not only for work or business purposes, but also for private purposes, such as a weekend trip with the family. This way of using cars is not neutral for tax settlements. At least theoretically. Well, in the case of passenger cars used by tax-exempt employees, there is a reimbursement of costs incurred by the employee for the use of vehicles owned by the employee, for the needs of the workplace, in local driving, if the obligation to bear these costs by the workplace or the possibility of granting the right to reimbursement of these costs results directly from the provisions of other acts - up to the amount of the monthly lump sum or up to the amount not exceeding the amount determined using the rates for 1 kilometer of the vehicle mileage, specified in separate regulations issued by the competent minister, if the mileage of the vehicle, with the exception of lump sum payments, is documented in the mileage register vehicle driven by the employee.
If the taxpayer uses the company car assigned to him (constituting the company's property) for private purposes, e.g. goes on a weekend or vacation with it, he obtains the so-called income from gratuitous benefits. In other words, the employer should add to his salary the amount that the employee would normally have to pay for renting the same car in the same city and for the same period.
Commuting to the place of business
Expenses that do not directly contribute to the creation of a specific income cannot be considered as tax deductible costs, and such expenses include expenses related to the travel of a person running a business from his place of residence to the place of carrying out this activity.
Lending a private car
An interesting issue is that a partner in a partnership makes his own private car available for the purposes of the company's operations. Due to the fact that in the case of partnerships, the taxpayers of income tax are the partners and not the company, the tax authorities assume that the remaining partners (other than the shareholder sharing the car) generate income from gratuitous benefits.
The value of this income is determined on the basis of the market prices of a similar rental (if the same brand, year, mileage and technical condition, etc. cannot be found in the area where the company operates). It is the percentage share of taxable partners in the company. Thus, if, for example, there are four partners, and their shares are equal, and the car is provided by one of them, each of the other three generates income equal to the market rent for the rental of such a car. The companies may also include as tax deductible expenses the expenses related to the maintenance and operation of the passenger car used by the partner. However, they must remember about the applicable limits in this regard. The rules are in this case the same as when an employee of the company uses such a company car.
Car insurance expenses
Taxpayers may not count as tax deductible costs premiums for car insurance in the amount exceeding their part determined in the proportion in which the equivalent of PLN 20 thousand remains. euro. This amount is determined by converting 20 thousand. Euro to zlotys at the average Euro exchange rate announced by the National Bank of Poland on the date of concluding the insurance contract, in the value of the car adopted for insurance purposes. This restriction does not apply to cars that do not meet the criteria set out in the definition of a passenger car, i.e. trucks and special vehicles.
As the described regulations do not specify what type of car insurance is meant, it should be considered that they apply to all motor insurance, i.e. third party liability, comprehensive insurance, accident insurance. In the case of cars constituting a fixed asset, these expenses are no longer limited.
The situation is different in the case of cars, which the taxpayer has not included in fixed assets, e.g. in the case of an entrepreneur's car used for the purposes of private business. In this case, the settlement is made on the basis of the mileage register. It must also be taken into account that this limit is common to all expenses related to the use of passenger cars. Therefore, it applies to total expenses for fuel, spare parts, inspections, ongoing repairs, purchase of car accessories, etc.
Accident losses and thefts
The taxpayer will not include as tax deductible costs losses resulting from the loss or liquidation of cars and the costs of their post-accident repairs, if these cars were not covered by voluntary insurance. Therefore, entrepreneurs who do not purchase auto insurance for company cars are exposed to many negative consequences. If the car is stolen, they will not be able to include its value in the cost. Only expenses related to the transport of the damaged vehicle will be the tax cost.
It is important for taxpayers to recognize the value of a stolen car as tax deductible costs. It can be done by those entrepreneurs who have purchased an autocasco policy. Tax laws contain two other restrictions on recognizing loss of fixed assets as costs. They concern:
- losses in fixed assets and intangible assets in the part covered by the sum of depreciation write-offs (including also write-offs not recognized as tax deductible costs),
- losses resulting from the liquidation of non-fully depreciated fixed assets, if these assets have lost their economic usefulness due to a change in the type of activity.
Company car depreciation
All things and rights acquired for the company's needs constitute its panties. This also applies to cars. If the expected period of their use exceeds one year, the entrepreneur is forced to include them in fixed assets. The consequence of this is that they should be properly registered and depreciated (fixed assets register), i.e. included in costs for a specified period of time, not at one time.
Most often this is done using appropriate percentage ratios that allow us to determine what part of the expenditure for the purchase of such an asset in a given year may be included in costs (these are the so-called depreciation rates).
Importantly, and which should be emphasized once again, fixed assets include only those cars that will be used in the company for more than a year. Therefore, if we predict that the use of such a car will be shorter, we do not count it as fixed assets, with the proviso that if it later turns out that the useful life was longer, we will face a cost adjustment and the need to pay penalty interest.
There are, however, some exceptions to these general principles. Well, the legislator allows a slightly different treatment of those fixed assets, the initial value of which does not exceed PLN 3.5 thousand. zloty. It is true that in the case of cars, such a situation occurs relatively rarely, but it does happen when the property of a sole proprietorship includes a car that was previously in the private use of the owner of the company.
In the case of such cars (the value of which at the time of acceptance into the company's assets does not exceed PLN 3.5 thousand), the taxpayer has several possible procedures. First of all, it can decide for itself whether such a car (asset) is considered a fixed asset.
This means that even if he intends to use the car for more than a year, he may consider that it does not constitute a company's permanent property and the expenses related to its purchase should be immediately recognized as tax deductible costs (one-off). The taxpayer can also use a car, the value of which does not exceed PLN 3.5 thousand. PLN, included in the company's fixed assets. Then he has two options again. It may decide to either make the so-called a one-off depreciation write-off, and therefore with one write-off, immediately enter all expenses for its acquisition, the initial value to tax costs. But it may also decide to use normal depreciation, i.e. making successive write-offs according to the depreciation rates applicable for this type of asset (here you can use the increased rate, which will be discussed in a moment).
If the taxpayer does not classify the car as fixed assets due to the fact that its value does not exceed PLN 3.5 thousand. PLN, the car is not treated as a fixed asset. As a consequence, whenever its value exceeds PLN 1.5 thousand, PLN, the taxpayer must disclose it in the equipment records kept next to the tax revenue and expense ledger. Of course, this does not apply to taxpayers keeping full accounting, because in their case you have to follow the rules resulting from the Accounting Act, which imposes a slightly different method of recording depreciation.
Determining the initial value of the vehicle
Depreciation write-offs are made from the initial value of the car, starting from the first month following the month in which the car was entered into the fixed assets register (list), until the end of the month in which the sum of depreciation is equalized with its initial value or in which it was either liquidated or disposed of. The initial value of fixed assets is considered to be:
- in the event of purchase by purchase - the purchase price thereof,
- in the case of production on its own - production cost,
- in the case of acquisition by inheritance, donation or otherwise free of charge - market value on the day of acquisition, unless the donation agreement or the free transfer agreement specifies this value in the lower amount,
- in the case of acquisition in the form of a non-cash contribution (in-kind contribution) made to a civil partnership or commercial partnership, determined by the partners on the date of the contribution or share, the value of individual fixed assets and intangible assets, but not higher than their market value, on the date of the contribution.
Principles of depreciation of passenger cars
The depreciation rate for cars (regardless of their qualification) is 20 percent. annually. Importantly, this rate is the maximum rate. Therefore, in the depreciation plan, you can also adopt a lower rate, e.g. 10%. The depreciation of cars is characterized by the necessity to adhere to several specific restrictions. First, depreciation write-offs for passenger cars, the initial value of which exceeds the equivalent of PLN 20 thousand. euro (converted into zlotys at the average exchange rate of the National Bank of Poland on the day of handing over the car for use), I do not constitute a cost in the part where the depreciation write-off is calculated on the surplus of the initial value over the limit of PLN 20 thousand. euro. The initial value will also include a part of the non-deducted VAT related to the purchase of a passenger car (due to the applicable VAT limitations on the deduction of input tax on such cars). It should also be emphasized that the statement that a passenger car is not depreciated above PLN 20,000 is not in line with the regulations. euro. Such depreciation occurs, but the cost generated by this depreciation is excluded from tax deductible costs.
The choice of depreciation method
Due to the large number of possibilities, taxpayers have problems with determining the most advantageous method of car depreciation. Let us remind you that the basic depreciation rate is 20%. There are a few simple rules to follow when determining the fastest depreciation method.
Firstly, if we are dealing with a used or improved car, the maximum allowable depreciation rate using the individual method is 40%. This applies to both passenger cars and trucks. Therefore, in the vast majority of cases, the application of this method will be the most advantageous.
Secondly, in the case of a car not classified as a passenger car, it is possible to apply the degressive method using a coefficient not higher than 2. In the case of using these vehicles in a plant located in a commune with a particular risk of high structural unemployment or in a commune threatened with recession and social degradation, this coefficient may not exceed is 3.
Thirdly, the application of the coefficient 1.4 due to intensive exploitation or the requirement of special technical efficiency is profitable only if we do not have the possibility to use other methods of accelerating depreciation. In this case, the straight-line method of depreciation is used.
Fourth, when we have the status of a small taxpayer or start running our business, we can take advantage of a one-off depreciation charge.
Effects of not charging depreciation
The Personal Income Tax Act provides that if taxpayers acquire or produce on their own assets with an initial value exceeding PLN 3.5 thousand. PLN and due to their expected use period equal to or shorter than one year, they will not include them in fixed assets or intangible assets, and the actual period of their use will exceed one year, they are obliged to disclose them, adjust tax deductible costs and pay penalty interest . Obviously, these rules also apply to passenger cars which are the company's assets.
Incidentally, it is worth noting that a similar solution is provided for in the Corporate Income Tax Act. Therefore, in the described situation, first of all, the taxpayer is obliged to reduce costs by the difference between the purchase price or production cost and the amount of depreciation for the period of the car's current use, calculated using the depreciation rates specified in the list of annual depreciation rates, constituting Appendix No. 1 to the PIT Act.
If the aforementioned difference is higher than the costs of a given month, the unsettled excess of costs reduces the costs in the following months. Second, the taxpayer must charge penalty interest.
The taxpayer has to pay the penalty interest to the tax office - according to the regulations - by the 20th day of the first month, which follows the month in which that year expired. In other words, when the year of using the car passes, for example, on April 20, the interest has to be paid by May 20 (of course, in accordance with the rules resulting from the Tax Ordinance regarding time limits). The amount of interest is calculated for the period from the date of including the expenses for the purchase of the car as tax deductible costs until the date when the period of its use exceeds one year. The amount of interest must be shown in the annual tax return.
Sale of a company car
The consequence of the sale by a natural person conducting non-agricultural business activity of a car classified as fixed assets is the creation of income from business activity.Income from such activity is also income from the sale of fixed assets used for the needs related to business activity, included in the register of fixed assets.
The income from the sale of a passenger car for consideration will be the value expressed in the price specified in the contract, less the costs of the sale. It should be remembered that if the price of the car deviates from its market value without justifiable reason, the taxpayer's income will be determined by the tax authorities in the amount of this market value.
VAT on the sale of the car
Sales of used cars for business purposes may be taxed at 23%. VAT rate. It can also be exempt from this tax. The supply of passenger cars is exempt, for the purchase of which taxpayers are partially entitled to deduct VAT. However, in order for the good (car) to be considered used, the period of its use by the taxpayer making the delivery must be at least six months. A taxpayer who purchases a private car as a natural person (i.e. not as part of a company) is not entitled to deduct VAT upon its purchase.
When the taxpayer was entitled to deduct input VAT on purchase, there is an obligation to correct the deducted tax in the event of a change in the intended use of the goods purchased for the purposes of business activity, which is the sale of the car as a goods exempt from VAT. For goods that are not fixed assets, adjustments are made after the end of the year in which the taxpayer was entitled to deduct VAT in connection with the purchase of goods.