When can interest on a loan be included in tax costs?

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Entrepreneurs often look for external sources of financing their investments. More than once they decide to take a bank loan. Can interest on a bank loan constitute a tax deductible cost? Answer in the article!

Cost of getting income

We call tax deductible costs - under Art. 22 of the PIT Act - costs incurred to achieve income or to maintain or secure a source of income, excluding the costs listed in art. 23 of the above-mentioned act. Art. 23 sec. 1 point 8 lit. a) specifies, however, that tax deductible expenses do not include expenses incurred on loans taken, with the exception of capitalized interest on such loans.

Is interest on the loan a tax cost?

Accordingly, the very amount of the loan, both when it is received and when it is returned, does not affect the creation of tax revenues or costs. The cost is, however, the fees associated with the loan - including interest. However, in order for an entrepreneur to account for the interest amount in costs, certain conditions must be met:

  • the funds from the loan must be used for business purposes;
  • the entire commitment must be properly documented;
  • interest must be paid.

Entrepreneurs who finance their investments with money from the loan have the option of obtaining special loans - then their relationship with the company's goals results from the name of the loan agreement and from more favorable repayment terms or lower servicing costs. However, if - for various reasons - it is not possible to conclude such an agreement, consumer loans are taken out, which then finance the company's needs. Interest may be a company expense in both cases - it does not depend on the name of the loan agreement or the type of loan, but on what the funds were actually used for. What an entrepreneur using a consumer loan for the purposes of his business must pay special attention to is taking care of the documentation - it must undoubtedly prove that the expenses were incurred for corporate purposes.

The position of the Director of the National Tax Information of 10 August 2018 (No. 0115-KDIT3.4011.281.2018.1.PSZ) is consistent with the above, which reads:“However, pursuant to Art. 23 sec. 1 point 8 lit. and the above-mentioned the Personal Income Tax Act is not considered tax deductible expenses for the repayment of loans (credits), with the exception of capitalized interest on these loans (credits), except that the tax deductible costs are expenses for repayment of the loan (credit) in the event that when the loan (credit) was indexed with the exchange rate of a foreign currency, if:

  • the borrower (borrower) in connection with the loan repayment (credit) returns the principal amount greater than the loan received (credit) - in the amount of the difference between the amount of the capital returned and the amount of the loan received (credit),
  • the lender (creditor) receives cash repayment of principal in the amount lower than the amount of the loan granted (credit) - in the amount of the difference between the amount of the loan (credit) and the amount of capital returned. "

Art. 23 sec. 1 point 32 of the PIT Act also regulates the issue of when the interest may be included in the costs. According to it, interest that is accrued but not paid or redeemed cannot be booked as an expense. Therefore, it should be remembered that such an expense can be booked only on the date it is incurred - the accounting document here is not a loan repayment schedule, but a payment confirmation.

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Interest on an investment loan and tax costs

Directly in company costs you can include interest on a loan, which is used to finance expenses for current operations. However, if the funds from the loan are used to purchase or create a fixed asset - then the matter looks a bit different, thanks to Art. 23 sec. 1 point 33 of the PIT Act - the costs of conducting business activity do not include interest increasing the investment costs during the period of the investment implementation.

Therefore, the interest paid before the fixed asset is entered into the company's records will increase the initial value of this asset, and will be included in the costs only when depreciation is written off.

The Director of the National Tax Information confirms the above position in the Individual Ruling of August 10, 2018 (No. 0115-KDIT3.4011.281.2018.1.PSZ): “Referring to the possibility of including interest on a loan as tax deductible costs, taking into account the above-mentioned regulations, it should be stated that the interest accrued until the land intended for use for business purposes is transferred for use - cannot be recognized directly as tax deductible costs. Such interest increases the initial value of the fixed asset. On the other hand, the interest on the loan, calculated and paid after the date of transferring the fixed asset - land - for use, will be able to be recognized directly as tax deductible costs on the date of their payment. "

Importantly, there is no possibility of maneuver here by paying interest after the payment date and after the fixed asset has been introduced into the company, because in this case it is not the date of payment, but the date of interest accrual included in the loan agreement that is important.