Settlement of car rental financed by the insurer

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A road collision involving a car that is a company's fixed asset is associated with the need to settle related financial events on the basis of income tax. It is primarily about the correct recording and settlement of both the received compensation and the costs of post-accident repair. The car rental settlement financed by the insurer will also be considered. How to do it correctly in terms of income tax? - about it below!

The relationship between the vehicle and the activity is decisive for revenue

Recognition of business income due to the received compensation requires, in the first place, to make arrangements regarding the relationship of a given car with the business conducted by the taxpayer. The above results from the literal wording of the provisions of the PIT Act, here we are talking specifically about art. 14 sec. 2, point 12, reading as follows:

"Income from business activity also includes received compensations for damage to assets related to the conducted business activity or running special departments of agricultural production". At the beginning of 2019, taxpayers do not have to recognize income from business activity due to compensation received for damage to fixed assets after meeting certain conditions (expenditure on renovation, purchase or production of a fixed asset from a given type of KŚT) - Art. 21 sec. 1 point 29b of the PIT Act.
Passenger cars are excluded from the above exemption. Therefore, the notion of a "relationship" between a car and its activity should be considered. A car related to business activity is certainly a vehicle that is part of the company's assets (accounted for in tax costs) or used in business on the basis of a rental, lease, leasing or other contract of a similar nature.

If the taxpayer uses a car that is generally used privately in business, which, in addition, has not been introduced to the state of the company's assets, then the compensation received for damage to this vehicle will not constitute business income - therefore it is not subject to accounting at all. In this situation, the notions of "use in economic activity" and "connection with economic activity" cannot be equated, which was emphasized in particular by the Supreme Administrative Court in the judgment of 11 May 2012, file ref. II FSK 2169/10, recognizing that:

“Therefore, one should share the opinion of the author of the cassation appeal that in order to be“ connected with the activity ”within the meaning of the above-mentioned provision, the entire circumstances of the present case should be considered, and not only the fact of using the car in question in business activity. The court, apart from stating that the taxpayer did not enter the vehicle in question into the fixed assets register and broad reference to the content of Art. 17 sec. 1 of the Act on flat-rate income tax on certain revenues earned by natural persons, did not assess the circumstances that the taxpayer did not include depreciation write-offs for the consumption of a fixed asset as tax deductible costs, or that the purchase amount of the car in question was not taken into account by the taxpayer under tax settlements ".

Revenue compensation regardless of the method of liquidation of the claim

If the received compensation concerns a car related to business activity, then it should be recorded, i.e. booked. It does not matter whether the repair expenses will be recognized as tax deductible costs or the taxpayer will repair the car on his own (more on this subject in the individual interpretation of September 23, 2019 issued by the Director of the National Tax Information, ref. 0114-KDIP3 -2.4011.432.2019.2.AC).

The regulations do not create any alternative in terms of tax revenues (compensation will be revenue in each case), but they contain certain restrictions on the costs of obtaining them. If the vehicle did not have voluntary insurance (AC - autocasco), then the losses resulting from the loss, liquidation or post-accident repair of such a vehicle may not constitute taxpayer's tax deductible costs (Article 23 (1) (48) of the PIT Act). The discussed issue is presented in the example below.

Example 1.

Mr. Jacek took part in a road accident through no fault of his and received compensation in the amount of PLN 10,000. His car was used in his business and was a fixed asset for his company. In connection with the above, the amount of PLN 10,000 should be entered in column 8 - Other revenues, on the date of receipt of compensation.

Due to the fact that Mr. Jacek's car did not have voluntary autocasco insurance, the expenses for the repair of the vehicle will not be tax deductible. Although he received an invoice for the repair of the vehicle for the amount of PLN 8,000, due to the exclusion referred to above (contained in Article 23 (1) point 48 of the PIT Act), this invoice cannot be settled on the basis of income tax.

By the way, it should be added that the tax office may refuse the right to include a post-accident car repair in company costs, when the taxpayer's actions grossly contributed to the damage, even in the case of having an AC insurance. Such a situation will be, for example, participating in a collision under the influence of alcohol.

Car rental financed by the insurer

It often happens that the injured person is forced to rent a replacement car for the period necessary to liquidate the damage, i.e. repair the damaged vehicle. Compensation for the costs incurred in this respect is in fact also a form of repairing the damage that has been caused to him, which means that it takes the form of compensation.

In practice, this usually takes place in such a way that the aggrieved party incurs certain expenses for renting a replacement vehicle and then requests reimbursement of the costs incurred from the insurer. This situation is presented in the example below.

Example 2.

Mr. Dariusz took part in a car collision not his fault. Due to the fact that the car is used in business activities, he rented a replacement car for the time of repairing his vehicle, for which he received an invoice for PLN 1000 net + PLN 230 VAT.

Mr. Dariusz booked this invoice under the date of issue, including the amount of PLN 836.25 in the KPiR in column 13 - Other expenses. The replacement car has not been reported for a full VAT deduction on the VAT-26 form, hence it was possible to deduct 50% of VAT (PLN 115), while the value of the tax cost was calculated as follows: (1000 + 115) x 75%.

Mr. Dariusz asked the insurer to reimburse the costs of renting a replacement vehicle from the perpetrator's civil liability insurance policy. The insurer transferred to his bank account the net amount from the invoice for the replacement car rental and 50% VAT, due to the fact that the other half of the tax was deducted. Mr. Dariusz should enter the amount of PLN 1115 in the column 8 - Other income, on the date of receiving the refund from the insurer.

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Settlement of car rental financed by the insurer - cashless settlements with no impact on the generation of income

A common practice during the settlement of claims related to vehicle collisions are non-cash settlements, where the insurer does not pay compensation to the injured party, but regulates the liability resulting from the invoice for the repair of the vehicle directly to the account of the workshop that repaired the damaged vehicle.

Another situation in which the aggrieved party does not receive compensation is the conclusion of the so-called insurance contract. assignment of rights under the insurance contract to the financing party (lender or lessor). The procedure consisting in establishing an insurance assignment will ensure that the compensation will be transferred to the lender or lessor. This solution is designed to secure the repayment of liabilities by the vehicle user.

Also in the case of "non-cash" liquidation of damage to a vehicle related to business activity, tax revenue should be recognized and properly recorded. In this situation, it does not matter that the physically injured person did not receive the money. Tax income from compensation on a company car will also arise when the insurer pays cash to the service repairing the vehicle or to the entity for whom the assignment of rights under the insurance contract has been established. The above was confirmed, inter alia, by Director of the National Tax Information in an individual ruling of February 1, 2018, file ref. 0114-KDIP3-1.4011.433.2017.2.ES, recognizing, inter alia:

“It should be noted that in the situation presented above, one cannot agree with the Applicant's position that he did not receive any compensation due to the damage caused. This circumstance is not affected by the fact that, by assigning insurance, he transferred the right to compensation to the bank. It was the compensation awarded to the Applicant with the payment transferred to the crediting bank's account as the repayment of the loan granted to the civil partnership T. These were therefore funds due to the Applicant within the meaning of Art. 14 sec. 1 of the Personal Income Tax Act, and included directly in revenues by the provision of Art. 14 sec. 2 point 12 of the above-mentioned the law.In connection with the above, the position of the Applicant was considered incorrect ”.