Representation and advertising costs versus tax deductible costs

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Representation and advertising costs are expenses that are highly controversial whether or not to be included in corporate costs. It is caused by the fact that there are no clear regulations in this regard and the frequent changes of the law. Read our article to find out when representation and advertising costs can be tax deductible and when not.

Costs of representation

Initially, expenses to be considered as representation costs had to be characterized by features such as:

  • creating a positive impression,
  • grandeur,
  • above-average measure.

However, the jurisprudence adopted new criteria regarding the recognition of expenses as representation costs. In the judgment issued by the Supreme Administrative Court on January 25, 2012, file number II FSK 1445/10, we can read: The costs of the representation referred to in Art. 23 sec. 1 point 23 u.p.d.o.f., are expenses related to the representative office of the taxpayer or the enterprise run by him, regardless of their grandeur or place of service.

Gifts for customers

Gifts for contractors are also problematic with regard to representation costs.

In a situation where gifts for contractors contain a company logo, they are considered as normal advertising costs and VAT may be deducted from such expenses (in the case of active VAT payers) and the expense may be included in company costs.

In a situation where gifts do not have a corporate logo, they should be treated as representation costs, i.e. the expense cannot be included in the company's costs. Confirmation of this position can be found in the interpretation ITPB3 / 423-406 / 10 / PS issued on October 21, 2010 by the Director of the Tax Chamber in Bydgoszcz, where we read: gadgets provided free of charge during business meetings, if they bear the Company's logo permanently and their unit value is relatively low, they will not be representative, as referred to in Art. 16 sec. 1 point 28 of the Act, and consequently the expenses relating to them will also constitute, pursuant to Art. 15 sec. 1 of the Income Tax Act, tax deductible costs. Giving your customer alcohol with the company logo on it is an expense recognized as representation, which cannot be counted as an expense.
The exception is the donation of alcohol of your own product, which contains the company logo. This practice can be applied, for example, to vineyards.

Meals and clothing for employees

In addition, it should be emphasized that expenses on clothing, regenerative meals or drinks for employees working in special conditions may be included in company costs. This fact results from Art. 2377 § 1 of the Labor Code, where we read: The employer is obliged to provide the employee free of charge working clothes and footwear that meet the requirements set out in the Polish Standards:

  • if the employee's own clothing may be damaged or significantly soiled;
  • due to technological, sanitary or occupational health and safety requirements.

and art. 232 of the Labor Code, where we read: The employer is obliged to provide employees employed in particularly onerous conditions, free of charge, with appropriate meals and drinks, if it is necessary for preventive reasons. The Council of Ministers shall define, by means of a regulation, the types of these meals and drinks and the requirements they should meet, as well as the cases and conditions for their dispensing.

In such a situation, the incurred expenses can be classified as tax costs, as they are expenses that the employer-taxpayer is obliged to bear. In the case of purchasing coffee, tea, water or beverages for employees not working in special conditions, such expenses may also be included in tax costs.

Confirmation of this position can be found in the letter of the Head of the Second Tax Office in Rzeszów of October 10, 2005, No. II US.I.PB / 423-11 / 05, where we read: (...) the employer determines the types of personal protective equipment as well as work clothing and footwear, the use of which at specific positions is necessary in connection with Art. 2376 § 1 and article. 2377 and the expected periods of use of work clothes and footwear. Although in the case at hand, the employer did not directly establish the period of use of the workwear, but indicated the circumstance which entitles the employee to pick up the clothes. Such a solution was justified by the taxpayer by the specificity of the workplace at the paint mixer, described in the introductory part of this justification, and by the need to care for the company's image. In view of such a state of affairs, the local tax authority recognizes the expenses incurred by the company for the purchase of workwear, then transferred, in accordance with the above-mentioned rule, to employees working at the paint mixer as tax deductible costs (...).

Representation costs and VAT

As a rule, representation expenses may not constitute a tax cost (Article 23 (1) (23) of the PIT Act), however, it is possible to deduct VAT from such expenses (Article 16 (1) of the Corporate Income Tax Act). This is also confirmed by the individual interpretation issued by the Director of the Tax Chamber in Łódź of March 6, 2012, No.IPTPB3 / 423-319 / 11-2 / GG, in which we read: (...) The costs of representation are not a tax deductible cost (...), but the input tax on goods and services is a tax cost in the part in which, in accordance with the provisions on tax on goods and services, the taxpayer is not entitled to a reduction or refund the difference in tax on goods and services (...).

The exception in this regard are accommodation and catering services, in these two cases it is not possible to deduct VAT, as provided for in Art. 88 sec. 1 point 4 of the VAT Act.

Advertising expenditure

Advertising is the dissemination of information about a given company, product or service in order to draw attention to it. Additionally, the purpose of advertising is to highlight the advantages and encourage you to buy. Advertising can take many forms, such as an advertisement in a newspaper, radio or television, posters, leaflets, banner advertisements, sponsored articles and handing out product samples to potential buyers. The regulations do not prohibit the recognition of advertising expenses as costs because they are designed to generate a new source of income.

Example 1.

Mr. Janusz will be introducing a new product to the market in 2021. In November 2020, he launched an advertising campaign, for which the invoice was issued on December 20, 2020, on the same day it was completed. On the part of the entrepreneur, a question arose in what period should he include the expenditure as costs.

The method of cost settlement depends on the adopted cost accounting method.

  • If the cash approach is adopted: although the products will be sold from January 2021, the campaign took place in 2020 and should therefore be included in the 2020 costs this year.
  • If the accrual method was adopted, the expenditure should be settled proportionally to the periods to which the expenditure relates. 2 months in 2020 (November, December) and the rest in 2021.

Representation and advertising costs - summary

As a rule, the costs of representation may not constitute a tax cost, but it is possible to deduct VAT on such expenses. The exception in this regard are expenses for catering and hotel services, from which in no case is it possible to deduct VAT.

In terms of advertising costs, these can represent a business cost. It is also possible to deduct VAT on such expenses. Start a free 30-day trial period with no strings attached!

Representation and advertising in the wFirma.pl online accounting system

Accounting for representation expenses

In the case of active VAT payers, in order to deduct VAT from the invoice documenting the costs of representation in the wFirma.pl system, go to the RECORDS tab »PURCHASE VAT REGISTER» ADD ENTRY.

In the generated window, complete the data in accordance with the state on the invoice. This method of booking will result in including the expenditure only in the VAT register of purchases, and thus it will reduce the output VAT.

Advertising cost accounting

For advertising expenditure, the invoice documenting the expenditure must be entered in the pattern EXPENDITURE »ACCOUNTING» ADD »VAT INVOICE / INVOICE (EXCLUDING VAT)» OTHER BUSINESS-RELATED EXPENDITURE.

In the generated window, complete the required data in accordance with the state on the invoice.

The invoice will be included in column 13 of the KPiR - other expenses and the VAT register of purchases in the case of active VAT payers, if the booking was based on a VAT invoice.