Tax-deductible costs in business activities

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Taxpayers who have chosen general rules or a flat tax as a form of settling income tax with the tax office may reduce the tax base by tax deductible costs. However, please note that not all expenses may be a tax deductible!

Tax deductible costs - definition

The definition of tax deductible costs can be found in the Personal Income Tax Act. In art. 22 sec. 1 indicates that tax deductible costs are expenses incurred in order to achieve income or to maintain or secure a source of income.

On the other hand, the expenses listed in Art. 23 of the Act, i.e. in the catalog of non-tax deductible expenses. Art. 22 sec. 1 of the Personal Income Tax Act:
Tax deductible costs are costs incurred in order to achieve income or to maintain or secure the source of income, with the exception of the costs referred to in article 1. 23. Pursuant to Art. 23 of the Personal Income Tax Act, tax deductible costs do not include, among others:

  • representation expenses,
  • interest on late payment of tax and budget liabilities,
  • expenses for repayment of loan installments and loans (the cost may be only the interest part of the loan installment, if it has actually been paid),
  • depreciation write-offs exceeding PLN 150,000 for passenger cars,
  • expenses for motor vehicle insurance in the amount exceeding their part determined in such proportion as the equivalent of PLN 150,000.

Advance payment transferred and tax deductible costs

Taxpayers often make an advance payment before delivering or providing a service. Provided to suppliers on account of, inter alia, it is a form of security for both parties to the transaction. Therefore, the question arises whether a prepayment may constitute a tax deductible cost? As a rule, paid advances, down payments and prepayments do not constitute tax deductible costs. However, it was not explicitly specified in the regulations, but only the nature of the advance payment proves it. Expenses that are definitive in nature are considered to be tax deductible costs. Due to the fact that the advance payment is not final, it cannot constitute a tax deductible cost.

This position is confirmed by the interpretation of the Director of the Tax Chamber in Łódź of December 2, 2016, ref. No. 1061-IPTPB1.4511.819.2016.2.MM, in which we read:

"Pursuant to Article 22 (1) of the Act of July 26, 1991 on personal income tax, tax deductible costs are costs incurred in order to generate income or to maintain or secure a source of income, except for the costs listed in Article 23.

Therefore, in order for an expense incurred by a taxpayer to constitute a tax deductible cost, the following conditions must jointly occur:

  • was incurred by the taxpayer,
  • it is definitive, and therefore non-returnable,
  • is related to the business activity conducted by the taxpayer,
  • it was incurred in order to obtain income or to maintain or secure the source of income,
  • is not a cost mentioned in art. 23 sec. 1 of the act,
  • has been properly documented. "

How to document tax deductible costs?

As mentioned above, in order for an expense to be a corporate expense, it must meet the definition of tax deductible cost. But that's not all. In order to be able to include an expenditure in the KPiR, it must be properly documented.

The provisions specifying how to document tax deductible costs are included in the regulation of the Minister of Finance on keeping a book of revenues and expenses. Pursuant to § 11 sec. 3 the basis for entries in the books are the following accounting vouchers:

  • invoices, VAT RR invoices, bills and customs documents;

  • documents specifying a reduction in tax deductible costs or an increase in revenues on the basis of
    art. 22p of the Income Tax Act,
  • other evidence listed in § 12 and 13 of the Regulation, confirming the fact that a business transaction was carried out in accordance with its actual course, including at least:

    • reliable identification of the parties involved in the transaction to which the proof relates (name and addresses),

    • the date of issue of the proof and the date or period of the economic operation to which the proof relates, provided that if the date of the economic transaction corresponds to the date of issue of the proof, it is sufficient to indicate a single date,

    • the subject of the economic operation and its value and quantification,

    • signatures of persons authorized to properly document business operations.

In order for the documents to be the basis for an entry in the KPiR, they must be numbered or otherwise linked to the accounting entries made on its basis. It is important that the documents constituting the basis for the recognition of tax deductible costs are prepared in Polish, fully and understandable. This means that if entrepreneurs want to use, for example, abbreviations, they must be universally accepted. The accounting voucher may be issued in a foreign currency, but the entrepreneur will then be obliged to convert the amounts into PLN in accordance with the requirements of the Personal Income Tax Act.

Tax deductible costs - manual documentation

In certain cases, the entrepreneur does not have to apply for a proof of the company's expenses, and therefore can do it himself. In such a situation, internal evidence is used that:

  • must be dated and signed by the persons who made the expense,
  • specify the name, quantity, unit price and value of the goods,
  • or if they do not concern goods - the subject of the business operation and the amount of the cost.

Pursuant to § 13 sec. 1-2 of the above of the regulation, the entrepreneur may issue internal evidence on his own, including in case of:

  1. purchase, directly from a domestic producer or breeder, plant and animal products, unprocessed or processed industrially, if the processing involves ensiling plant products or milk processing or slaughtering slaughter animals and post-slaughter treatment of these animals;
  2. purchase from the public, classified in the Polish Classification of Products and Services (PKWiU), raw materials of herbal plants and wild forest herbs, berries, forest fruits and forest mushrooms (PKWiU ex 02.30.40.0);
  3. the value of plant and animal products from the taxpayer's own cultivation or breeding;
  4. purchase of auxiliary materials in retail trade units,
  5. costs of subsistence allowances and other charges for the time of employees' business travel and the value of allowances for business travel of persons running a business and persons cooperating with them;
  6. purchase from the public of post-consumer waste constituting secondary raw materials, excluding the purchase (purchase) of non-ferrous metals and cars and their components intended for scrap;
  7. expenses related to rent, electricity, telephone, water, gas and central heating, in the part attributable to business activities,
  8. court and notary fees,
  9. expenses related to parking the car in a situation where they are supported by documents that do not contain the data referred to in § 11 section 3 point 3; the basis for issuing an internal ID is a ticket from a parking meter, a coupon, a single-use ticket attached to the drawn up ID.

The most popular tax-deductible costs

What expenses are most often recognized as tax deductible costs? First of all, the purchase of commercial goods and basic materials. Further in the ranking, other expenses necessary for the company can be listed - company seal, internet domain, maintenance and equipment of the premises (rent, utilities, telecommunications), accounting services, bank charges, telephone, computer equipment, car or depreciation write-offs on fixed assets. In addition, fuel purchases and other costs related to the use of the vehicle also appear among the popular costs. From January 2019, the method of accounting for passenger vehicles used in business activities has changed, more on this in the article: Vehicle maintenance expense in 2019 - tax cost and VAT deduction It should also be mentioned that entrepreneurs very often incur expenses that, apart from being related to their activity, have the characteristics of a private expense. As a rule, a business expense may be business-related expenses that are not personal in nature. For such non-standard expenses, authorities can challenge the reasonableness of the cost and consider it as a private cost. The safest thing to do then is to apply for an individual interpretation.

An example of a non-standard cost may be the purchase of a suit by an entrepreneur as part of his business. It is not possible to unequivocally qualify such an expense as tax deductible costs, because additional conditions must be met that exclude the private nature of the expense. Such a position was taken by the Director of the National Tax Information in the individual ruling of September 18, 2017, ref. No. 0114-KDIP3-1.4011.235.2017.2.IF, where we read that:

(...) expenses for the purchase of a business attire with a permanent designation of the Applicant's company, fulfills an advertising function, as it aims to increase the company's recognition on the market, which may result in increasing revenues, and thus remains in a cause-and-effect relationship with the revenues generated, including or securing the functioning of the source of income.

To sum up, it should be stated that the expenses incurred for the purchase of a business attire with a permanent company designation are closely related to the conducted business activity and constitute a tax deductible cost pursuant to Art. 22 sec. 1 of the Personal Income Tax Act. "

Example 1.

Mr. Paweł provides tax advisory services as part of a sole proprietorship. Therefore, he purchased a suit (for a VAT invoice), which he wears for important ceremonies, e.g. conferences. Can an expense on a suit be a tax deductible cost?

As a rule, in order for an expense to be recognized as an expense, it must meet the definition of tax deductible cost, i.e. it must be related to the activity and cannot be personal. Additionally, the expense cannot be included in the catalog of costs that are not tax costs. Although the cost of purchasing a suit is not included in this catalog, it may be considered by the authorities as an expenditure of a personal nature. Sometimes the solution may be a company logo placed on the suit, which will confirm the use of the suit in the company for the purposes of increasing recognition and advertising. However, in such a situation, the taxpayer should apply for an individual interpretation.

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Tax-deductible costs - booking in wFirma.pl

In the wFirma.pl system, the posting of incurred expenses is very simple. To book the costs incurred, go to the EXPENSES »ACCOUNTING tab, then select the appropriate type of document:

  • In the case of active VAT payers, it will be: VAT invoice, Invoice (WITHOUT VAT), Internal proof
  • In the case of a taxpayer exempt from VAT, it is possible to choose: Expenditure or Internal proof

Then, in the window that appears, fill in the required fields, in accordance with the received document of purchase, including contractor's data, date of issue, receipt and payment date. In addition, in the displayed window, you should also select the appropriate type of expenditure, eg OTHER EXPENDITURE RELATED TO BUSINESS ACTIVITY, thanks to which the system will automatically include the incurred cost in the KPiR in the appropriate column.