Physical inventory in special cases - part 1

Service-Tax

A physical census provides a good deal of extra work for many entrepreneurs year after year. Some taxpayers start the process of determining inventory levels earlier, but at the end they add the difference at the end of the year. Others, like every year at the last minute. Still others face non-standard situations in which they are not fully aware of how to comply with tax law and not even accidentally abuses. The latter circumstances are discussed in this publication cycle.

What is a physical inventory

Pursuant to § 27 of the regulation on the operation of PKPiR, taxpayers are obliged to prepare and register with the PKPiR at the beginning (January 1) and at the end (December 31) of the inventory of materials and goods, called the physical inventory. It mainly contains a list of:

  1. commercial goods,
  2. basic and auxiliary materials (raw materials),
  3. semi-finished products,
  4. work in progress,
  5. finished products,
  6. shortages and waste.

The physical inventory should include at least the following elements:

  • name and surname of the entrepreneur who is the owner of the company,
  • date of the inventory,
  • sequence number of the item in the inventory,
  • detailed identification of the goods and other assets,
  • the quantity stated during the inventory along with the measurement unit,
  • price per unit in Polish zlotys,
  • the value resulting from the multiplication of the quantity of the product by its unit price,
  • the total value of the physical inventory,
  • the value of the reduction referred to in § 29, with an indication of the physical inventory items and the items in the book with which the reduction is related,
  • phrase "census completed in position',
  • signature of the owner and persons preparing the inventory.

In addition, the physical inventory should also contain items of goods that are the property of the owner but appearing on the date of the inventory outside the company's premises. In addition, the taxpayer should remember to include in the inventory goods that are not his property, i.e. foreign goods that, as at the date of the physical inventory, are at the taxpayer's premises. It should be noted, however, that in this case the person making the inventory is not required to recognize the value of these goods, but it is enough to specify the quantity in which they appear in a given plant and the entity that owns them.

Inventory of goods and materials according to the purchase or acquisition price

In addition to the valuation of own goods outside the company and foreign goods on the premises of the company, the taxpayer is obliged to valuate own goods and materials and include them in the inventory at purchase or acquisition prices or at market prices on the date of the inventory, if they are lower than the prices purchase or acquisition.
When it comes to the valuation of semi-finished products, semi-finished products, finished products and deficiencies of own production, the taxpayer will evaluate them at manufacturing costs.
Utility waste which has lost its original functional properties during the course of business activity will be assessed by the taxpayer according to the estimated value taking into account their suitability for further use.
The taxpayer is obliged to evaluate the goods and materials:

  1. on January 1 and at the end of each tax year,
  2. day of commencement of operations during the tax year,
  3. in the event of loss of the right to tax with a lump sum during the year,
  4. in the event of a change of shareholder, change in the proportion of shareholders' shares,
  5. in the event of liquidation of activities.

Determining the income based on the physical inventory

Taxpayers running a business and using the tax book of revenues and expenses, hereinafter referred to as PKPiR, are obliged to correctly determine the income from this activity.
This income, in the light of Art. 24 sec. 2 of the Personal Income Tax Act, hereinafter referred to as the PIT Act, is the difference:
P - K - RR = INCOME FROM ECONOMIC ACTIVITY where
P 🡪 income from economic activity,
K🡪 costs of business activities,
RR 🡪 difference in the value of the inventory between the value at the beginning of the year and the value at the end of the year

Inventory problems in construction services

After several years of operation, many taxpayers who provide construction services try their hand at the flat sale market. To this end, they either purchase land for construction which is a commercial commodity or already own such land.
When implementing a development project (apartments as ready-for-sale products), taxpayers purchase:

  1. various types of building materials and others,
  2. various types of construction services (earthworks, demolition works, etc.),
  3. construction of roads, pavements,
  4. media assembly services,
  5. works involving the cleaning up of the area,
  6. fencing installations,
  7. urbanization works,
  8. construction of gardens.

All purchases of the above-mentioned services make up the entire finished product, which will be apartments. Taxpayers are considering the classification and treatment of the above-mentioned purchases, if the apartments are not completed and sold by the end of a given year.
Referring to the identification (and valuation) of more problematic purchases, such as external services from subcontractors, the taxpayer building flats should include them in column 10 PKPiR according to purchase prices. The taxpayer should remember that still unfinished apartments (finished goods) will constitute work in progress, so all materials and services from subcontractors should be valued in the physical inventory at the cost of production (including this cost).
Taking into account §3 point 4 of the PKPiR regulation, the cost of production includes all costs related directly and indirectly to the processing of materials, the provision of services or the acquisition (extraction) of minerals, excluding the costs of selling finished products and services.
Moreover, the taxpayer should remember that the value of materials used for work in progress cannot be higher than the cost of production assessed and included in the inventory drawn up at the end of the year. Start a free 30-day trial period with no strings attached!

Commercial goods received by donation

Taxpayers running a business, depending on the type of business, purchase various types of commercial goods for business purposes. It sometimes happens that these goods are purchased through a donation, and other times through inheritance of the enterprise. How should the taxpayer behave then when settling the inventory, and then settling the income?

Example 1

The taxpayer running a business was inherited from his mother, which included, inter alia, commercial goods. Should the taxpayer include them in the inventory at the end of the year? What about the costs?
The taxpayer is obliged to include the commercial goods received as a donation in the inventory at the end of the year (if they were not sold during the year). For this purpose, the taxpayer will use the recognition of the value of these goods in column 17 of the PKPiR.
Bearing in mind the determination of the value of the received goods, in accordance with § 3 point 2 of the PKPiR Regulation, the taxpayer will define the value as the value of the same goods if the taxpayer were to purchase it under standard market conditions.

However, regardless of the recognition of the value of the above goods in the physical inventory at the end of the year, the taxpayer may not include their value in the annual income statement.
What is also important, when the taxpayer sells the goods received as a donation, then he will not be entitled to include their value as company costs, which will result in the obligation to tax PIT income tax at the full value of the sale.
Various problems faced by taxpayers during physical inventory counting occur in a considerable number and scale. Some of them have been identified above and presented the best possible solutions. Many questions remain. Further doubts of taxpayers were answered in the second cycle of publications.