Fire in the company - tax consequences

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It often happens that entrepreneurs face extraordinary situations when running a business. One of them is fire, destruction of property (goods, fixed assets), the effects of which also have tax consequences. Check what consequences a fire generates in the company!

Destroyed goods in company costs

According to the general rule, only those expenses that affect the achievement of income or the preservation or protection of the source of income may be tax costs. Moreover, the expense cannot be included in the catalog of expenses that cannot be classified as tax deductible costs. Therefore, it should be assumed that tax deductible costs are all rationally justified expenses related to the conducted activity, the purpose of which is to achieve, secure and maintain the source of income; whereas when determining tax deductible costs, each case, except those clearly indicated in the Act, requires an individual assessment in terms of a direct relationship with revenues and rationality of actions to achieve income.

In the case of losses in goods caused by fire, it is difficult to say that they are aimed at generating revenues. However, they are related to the overall activity conducted. Therefore, in principle, they can be a cost.

However, it is always necessary to assess whether the fire in the company was not the fault of the taxpayer, i.e. as a result of negligence or violation of regulations. The loss due to fire should be a consequence of a random event understood as an unforeseeable and unavoidable event. This is because losses in fixed assets and current assets cannot be considered as tax deductible costs if it is proven that the assets were not secured or were inadequately secured.

Such a position was confirmed by the Director of the Tax Chamber in Poznań in the individual ruling of March 2, 2012, ref. No. ILPB3 / 423-553 / 11-4 / EK, where we can read:

(…) that the losses in current assets should be excluded from tax deductible costs. This means that, as a rule, these losses, as related to the conducted activity, may be recognized as tax deductible costs. However, each case and each such economic event should be considered and assessed individually as a specific case, taking into account the facts of the case under examination. The resulting losses in the course of business activity, as a side effect, cannot be ignored in the tax bill. Losses in working capital should be assessed in terms of the overall activity conducted by the taxpayer.

As a rule, incurring expenses for the purchase of current assets, e.g. commercial goods, materials, packaging, is aimed at generating revenues. Therefore, losses in these current assets arising in the course of normal and rational operation of the taxpayer (e.g. properly documented natural losses) and losses resulting from random events (e.g. fire) should be included in the tax account when considering them as tax deductible costs, in the aspect of the established legal norms (…).

Importantly, the value of lost goods, which are included in column 10, when their losses are properly documented, should be transferred to column 13 of the book of revenues and expenses. In this way, the value of these goods will not increase the value of the inventory drawn up at the end of the tax year and, as a consequence, will constitute a tax deductible cost of non-agricultural business activity.

Fire in the company - loss of fixed assets

Pursuant to Art. 23 sec. 1 point 5 of the PIT Act, the part of the loss that was not covered with depreciation charges may be included in the tax deductible costs. The depreciation write-offs referred to in these provisions should be understood as the entirety of the write-offs made, including those which were not tax deductible costs.

Moreover, pursuant to Art. 23 sec. 1 point 6 of the PIT Act, losses resulting from the liquidation of non-fully redeemed fixed assets are not considered to be tax deductible costs, if these assets have lost their economic usefulness due to a change in the type of activity.

Consequently, it should be assumed that if the liquidation of a non-fully depreciated fixed asset results from the loss of its economic usefulness for reasons other than a change in the type of activity and is not attributable to the taxpayer, the resulting loss will be a tax expense.

The cost of obtaining revenues will also be the liquidation of the fixed asset resulting from its destruction, as a result of which it will lose its economic usefulness.

Such a position was confirmed by the Director of the Tax Chamber in Bydgoszcz in the individual ruling of August 29, 2013, ref. No. ITPB1 / 415-720b / 13 / PSZ, where we can read:

(…) if, in fact, the destruction of the building was a consequence of a random event, and the Lord exercised due diligence in securing against fire, the conditions for including non-agricultural business activity as tax deductible costs, the loss resulting from the above-mentionedfire up to the amount corresponding to the initial value of the lost fixed asset (building) less depreciation. (...)

The loss classified as tax deductible costs is the difference:

  • between its initial value and

  • accrued depreciation write-offs (constituting costs and not constituting tax deductible costs).