Losses from previous years as a way to reduce tax!

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Many entrepreneurs at the beginning of running a business, whether in the form of sole proprietorship or in the form of a partnership (for example a civil partnership), do not make profit, but show a loss. Such a situation may take place for several months or even several years. What to do in that case? Can losses from previous years be deducted in subsequent years, when the taxpayer already generates profits? We answer in the article.

Where to find the amount of loss from previous years?

We talk about loss when in a given tax year the sum of tax deductible costs exceeds the sum of revenues obtained.

The amount of the loss from previous years from the conducted business activity can be found in the annual tax returns for the previous years.

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Deduction of losses from previous years in the annual tax return - brochure KIS.pdf Description: manual completion

Entrepreneurs who settle accounts on general terms, submitting an annual tax return on the PIT-36 form, the amount of loss for a given year to be deducted in one of the next 5 years can be found on the second page of the declaration, in part E.1., In the fields concerning losses from non-agricultural economic activity (field number 80).

Taxpayers settling income tax according to the flat tax rules, submitting an annual tax return on the PIT-36L form, the amount of the loss can be found on the first page of the declaration, in part D, field 25, which relates to the loss from non-agricultural economic activity.

Settlement of losses from previous years in the annual tax return

The Personal Income Tax Act in Art. 9 sec. 3 provides that a taxpayer who has suffered a loss in a given tax year may deduct it from income in five subsequent tax years - provided that the loss from previous years will reduce the income from the same source from which the taxpayer suffered the loss. Another rule for deducting a loss is that:

  • for a loss incurred up to 2018 on a one-off basis, in one annual settlement, a maximum of 50% of the loss for each of the five previous years in which it occurred may be deducted.
  • for the loss arising from 2019 (i.e., for example, for the loss from 2019 shown in the annual tax return for 2020 submitted in 2021):
    • once, in one annual settlement, a maximum of 50% of the loss for each of the five previous years in which it occurred may be deducted, or,
    • one-off income obtained from this source in one of the next five consecutive tax years should be reduced by an amount not exceeding PLN 5,000,000. The underestimated amount (above the aforementioned limit) is subject to settlement in the remaining years of this five-year period, however, the amount of the reduction in any of these years may not exceed 50% of the amount of this loss.

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Example 1.

Mr. Jan Nowak achieved the following results from his activities in individual years:

2016 - loss of PLN 6,000

2017 - loss of PLN 3,000

2018 - income PLN 15,000

2019 - income PLN 20,000

In accordance with the applicable regulations, in the annual settlement for 2019, Mr.Jan may deduct from his income respectively 50% of the loss from 2016 (PLN 3,000) and 50% of the loss from 2017 (PLN 1,500). If, in the following years, Mr. Jan earns income, he may settle the remaining loss.

In the annual tax return PIT-36, intended for taxpayers settling on general principles, the amount of loss from previous years that we want to deduct from income in a given year should be entered on the third page of the tax return, in part F - specify the source of the loss and the amount - in field number 190.

On the other hand, in the PIT-36L declaration, intended for taxpayers settling their income tax on a straight-line basis, the amount of the loss from previous years should be entered on the first page of the declaration in part E - it is necessary to provide the source of the loss and the amount - in field number 34.

Settlement of losses from previous years in current income tax advances

The Personal Income Tax Act does not specify whether the loss from previous years should be settled only in the annual tax return, so it will be correct to reduce the income from the current months by the value of the loss to be deducted in a given year.

This position is confirmed by the directors of the Tax Chambers in the issued individual interpretations. One of them is the individual ruling of August 9, 2011 (reference number IPTPB1 / 415-42 / 11-2 / ASZ), issued by the Director of the Tax Chamber in Łódź, which stated:

“The regulations governing the settlement of losses in the following years do not indicate whether such a settlement should be made only after the end of a given tax year or during it. Consequently, in the absence of detailed regulations in this regard, it should be assumed that it is possible to settle this loss both during the tax year and after its end, and the choice of the appropriate method is at the discretion of the taxpayer.

If the taxpayer, despite deducting part of the loss from previous years during the tax year from the current income (advance payment), in the final settlement for that tax year, it did not generate income, but a loss, and therefore will not be able to benefit from the deduction, no he loses the amount of the loss that he has "pre-paid". This amount may be deducted in subsequent tax years. "

Losses from previous years - closure or suspension, and then resumption of operations

How to deal with a loss in a situation when the taxpayer closes or suspends business activity? When closing and reopening a business, or suspending and resuming it, the 5-year period for settling the loss suffered takes into account the period when the business was suspended or closed. After reopening and conducting business activity, the taxpayer retains the right to settle the loss from previous years on the same terms as he would have had if he had not closed the business - i.e. the 5-year rule continues to apply. The same should be done when activities are suspended and then resumed.