Compensation received as part of business activity

Service-Tax

When running a business, various situations arise that cause loss or damage. In connection with the damage, entrepreneurs may apply for compensation, i.e. damages. However, how to account for them in business?

Compensation - they are income!

The amounts of compensation for loss constitute tax income from business activity and it is not exempt from taxation with income tax. This applies to both legal persons and natural persons running a business.

In the case of entrepreneurs whose income is taxed with a lump sum on recorded income, the compensation received is subject to 8.5% taxation.

The moment when entrepreneurs receive income in the event of compensation is the date of receipt of the compensation to the company's cash desk or to the bank account.

As far as natural persons are concerned, the content of the insurance policy is of great importance, as private insurance (both property and personal not related to business activity) is exempt from income tax.

Compensation - traffic damage

A frequent situation is that entrepreneurs receive compensation to cover expenses for the repair and overhaul of a vehicle.

The amount of tax revenue due to received compensation depends on whether the taxpayers can classify the costs of car repair as tax deductible costs. It follows from the regulations that tax deductible costs include losses resulting from the loss or liquidation of a car and the costs of its repairs after an accident, if the car was covered by voluntary insurance (AC). In such a situation, the taxpayer will include the entire amount of compensation as tax revenue.

In the event that the car was not covered by voluntary insurance, the only income will be the excess of the amount of compensation over the costs of repairing the damaged car.

Compensation - lost profits

Compensation for lost profits is due to the aggrieved who, as a result of some events, lost the possibility of obtaining certain benefits. Thus, if the entrepreneur, as a result of the actions of third parties, loses the possibility of obtaining income from business activity, he has the right to demand compensation from the culprit. The compensation received in this way will constitute the entrepreneur's income from other sources, which should be included in the tax book of revenues and expenses, and thus - in the tax settlement.

Compensation from employees

In a situation where an employee has failed to perform or has improperly performed his or her duties, he or she may be financially liable.

When an employee causes damage to a third party in the performance of his employee duties, the employer covers the costs related to repairing the damage. However, it should be remembered that the employer may demand compensation from the employee, but it may not exceed the three-month salary of the employee, due to him on the day the damage occurred.

There are situations where an employee is responsible for the full amount of damage. This applies to damages:

  • which the employee caused intentionally,

  • resulting from entrusting the employee with property with the obligation to return or to settle.

This compensation is related to the conducted business activity, so it is also taxable income.

As a rule, most of the compensation that the entrepreneur receives is subject to income tax and should be entered in column 8 of the tax revenue and expense ledger.