Settlement of losses from previous years - what changes from 2020?
Loss is the excess of costs over income. However, when shown in business, it is not always a sign of an entrepreneur's financial problems. It happens that such a state of affairs results from implemented investments and indicates the company's development. From 2020, the settlement of losses in business is carried out according to new rules that are more favorable for entrepreneurs!
Settlement of loss from 2019
Settlement of a loss under the old rules is possible in the next five consecutive tax years, after which time it becomes time-barred. Additionally, in one year the entrepreneur was entitled to deduct a maximum of 50% of the amount of the loss suffered.
Deduction of losses from previous years in the annual tax return - brochure KIS.pdf Description: manual completion
From 2020, a loss on activity up to PLN 5,000,000 can be settled faster, of course, as long as the entrepreneur's income generated in the years following its reporting allows it. This means that the provision stating that in one tax year an entrepreneur has the right to reduce the tax base by no more than half of the loss from each year has been changed.
Art. 9 sec. 3 of the Personal Income Tax Act
For the amount of the loss from the source of income incurred in the tax year, the taxpayer may:
1) reduce the income obtained from this source in the next five consecutive tax years, provided that the amount of the reduction in any of these years may not exceed 50% of the amount of this loss, or
2) reduce the one-off income obtained from this source in one of the next five consecutive tax years by an amount not exceeding PLN 5,000,000, the uncollected amount is subject to settlement in the remaining years of this five-year period, however the amount of the reduction in any of these years does not may exceed 50% of the amount of this loss. However, nothing has changed with regard to the maximum time for which it is possible to settle losses in business. The entrepreneur still has 5 years to deduct the loss from previous years, if he fails to do so within this time, it will be time-barred.
Since when is the loss settlement in accordance with the new regulations?
The new legal regulations apply to losses incurred from 2019. This means that by submitting the annual tax return for 2018 or even 2019, taxpayers could not accelerate the settlement of losses from previous years. Only in the annual settlement for 2020, the entrepreneur who showed the loss in 2019 was able to settle it in full, of course, provided that he achieved a sufficiently high income that would allow the tax base to be reduced by the full amount of the loss from 2019. Let's explain it with examples.
Ms. Jolanta has been running her own business since 2017. In the early years, due to large investments, it showed losses:
- PLN 14,000 in 2017,
- PLN 10,000 in 2018,
- PLN 12,000 in 2019.
Only in 2020, Mrs. Jolanta achieved a profit on activity in the amount of PLN 50,000 and can deduct losses from previous years. In what amount is the loss from individual years accounted for?
Losses from 2017 and 2018 are settled according to the old rules, which means that Ms Jolanta can reduce the tax base by up to half of them from each year:
PLN 7,000 + PLN 5,000 = PLN 12,000
The loss from 2019 is settled according to the new rules, so the full amount of PLN 12,000 can be deducted at one time (the condition enabling the loss to be deducted on a one-off basis has been met, as it does not exceed the limit of PLN 5,000,000).
The total amount of the loss to be deducted in 2020 in the activities of Ms Jolanta is therefore:
PLN 12,000 + PLN 12,000 = PLN 24,000
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Ms Elżbieta has been running a business since 2004 and has been making a profit every year, but in 2019, due to unsuccessful investments, for the first time she showed a loss of PLN 5,100,000. In 2020, it achieved an income of PLN 6,000,000. How will Ms Elżbieta deduct the loss for 2019 as soon as possible?
Due to the fact that the loss was recognized in 2019, the settlement of the loss is possible by applying the new rules. Due to the fact that she exceeds the limit of PLN 5,000,000, in 2020 Ms Elżbieta could only deduct PLN 5,000,000 at a time. In subsequent years, provided that sufficient income in the business is achieved, it will be able to deduct the excess loss from 2019 above PLN 5,000,000, i.e. the remaining uncollected PLN 100,000, but taking into account the limit, the amount of reduction in any subsequent year cannot exceed 50% of the amount of this loss.
It must be remembered that an entrepreneur may deduct a loss on business during the next five consecutive tax years.
Settlement of loss - facilitation for taxpayers
Settlement of losses from previous years in accordance with the amended regulations are undoubtedly changes for the better. It is true that the number of years during which entrepreneurs can settle losses from their activities shown in previous years has not been extended, but the new legal regulations provide them with greater flexibility in this matter. Persons running a business gain the possibility of settling the full amount of the loss within one year, as long as it does not exceed the limit of PLN 5,000,000. The freedom to spread the deduction of losses from previous years into any amounts, provided that the applicable limits are respected.
Settlement of losses from previous years in the wfirma.pl system
In order for the loss from previous years to be taken into account when calculating income tax advances, first enter it into the wfirma.pl system through the tab: SETTINGS »TAXES» INCOME TAX »ADD DEDUCTION.
In the Year of deduction field, enter the year in which the loss is to be settled. In the field Loss to be deducted, enter the value of loss calculated outside the system that can be deducted in a given year. However, in the Sources of loss field, indicate the source and the tax years from which the introduced loss results. After saving, the loss will be automatically taken into account when generating an advance payment for income tax through the tab: START »TAXES» INCOME TAX »CALCULATE TAX.