Bad debt relief in PIT and CIT - everything you need to know

Service-Tax

One of the changes that came into force on January 1, 2020 is a bad debt relief in PIT and CIT. The introduction of the relief is to improve the financial liquidity of enterprises, often stopped by contractors who purchase services / goods and pay for them. The following article presents the method of functioning of the relief and the rules of its application, both on the part of the seller and the buyer.

Bad debt relief in income tax - the essence of the action

Pursuant to the Act on amending certain acts to reduce payment gridlocks, from January 1, 2020, taxpayers of corporate income tax (CIT) and personal income tax (PIT) are required to apply a bad debt relief. Pursuant to the transitional provisions, the bad debt relief regulations will apply to commercial transactions for which the payment deadline expires after December 31, 2019.

The mechanism of the tax relief in PIT and CIT is similar to the one currently functioning in the field of VAT. Pursuant to the provisions of the PIT Act (Article 26i (1)) and the CIT Act (Article 18f (1)), the basis for calculating the income tax may be:

  • value of receivables, which have not been paid within 90 days from the date of expiry of the payment date indicated on the invoice (bill) or contract - in the case of the seller, reduced by the value of receivables recognized as revenues,
  • the value of the liability, which has not been settled within 90 days from the date of expiry of the payment date indicated on the invoice (bill) or contract - in the case of the buyer, increased by the tax deductible costs.

Increases and decreases in the tax base due to non-payment of the invoice shall be made in the annual tax return submitted in the settlement for the year in which 90 days have elapsed from the date of expiry of the payment deadline indicated on the invoice (bill) or contract. The application of the relief is also possible in the advance on income tax calculated for the period in which the 90-day period has expired, counting from the payment date indicated on the invoice, bill or contract. To sum up, in the event of non-payment within the indicated period of 90 days, in the year for which the annual tax return is submitted or in the period of calculating the advance payment, the buyer must increase the tax base (by the value of the expenditure included in costs, actually unpaid), while the seller is obliged to reduce the tax base by the value of the income which the buyer has not paid.

Example 1.

The ABC company will issue an invoice to XYZ on February 1, 2020 for the amount of PLN 1230 (VAT PLN 230), with the payment date on February 14, 2020. The XYZ company will not settle the liability until May 14, 2020. In accordance with the above, ABC company in the advance payment for May may reduce the tax base by the value of the outstanding amount. If the payment is not settled by the date of submitting the tax return for 2020, ABC will reduce the tax base by PLN 1,000 in the annual tax return.

Bad debt relief in PIT and CIT - application conditions

The application of the bad debt relief in the income tax takes place only if certain conditions are met jointly:

  • the debtor buyer on the last day of the month preceding the date of filing the tax return, is not in the process of restructuring, bankruptcy or liquidation,
  • from the date of issuing the invoice (bill) or concluding the contract, which may be the subject of the applied relief (failure to pay on time), no more than 2 years have elapsed from the end of the calendar year in which the invoice (bill) was issued or the contract was concluded (counting from the activity which occurred last),
  • the issued invoice (bill) or contract document a commercial transaction concluded as part of the business activity of taxpayers (parties to the transaction), for which revenues are taxed on the territory of Poland.

In the event of failure to meet any of the above conditions, the seller may not apply a bad debt relief.

Relief for bad debts in PIT and CIT - moment of recognition

The application of the bad debt relief in PIT and CIT is possible in an advance on income tax for the period in which the 90-day period has expired, counting from the payment date indicated on the invoice, bill or contract. The discount is shown simultaneously in the annual tax return for the year in which 90 days have elapsed from the date of expiry of the payment deadline specified in the invoice (bill) or in the contract, starting from the first day following that date.
Bad debt relief in PIT and CIT may be included in the annual tax return (decrease / increase of the tax base or loss), provided that the receivable / liability is not settled or disposed of by the date of submitting the tax return. Similarly, in the event of payment settlement or sale of receivables, taxpayers are required to:

  • increasing the tax base or reducing the loss by the value of the seller's receivables,
  • reducing the tax base or increasing the loss by the amount of receivables on the part of the buyer.

respectively for the tax year in which the liability / receivable will be settled or disposed of.

Start a free 30-day trial period with no strings attached!

Example 2.

In the annual tax return for 2020, company B reduced the tax base by the value of the receivables unpaid by the buyer due to the bad debt relief in PIT. In March 2021, the buyer paid the entire amount due. Does the seller have to increase the tax base by the regulated amount?

In connection with the settlement of the payment, the seller will be obliged to increase the tax base in the advance payment for March 2021 (the period in which the claim will be settled). If the amount by which the taxpayer is obliged to reduce the tax base is higher than this base, the taxpayer has the option to reduce the tax base by the value not deducted in subsequent years, but not longer than for a period of 3 years from the end of the tax year for which it was created the right to apply the discount. If the value of the loss is less than the amount of the decreasing relief, the uncompensated value increases the tax base. It should be remembered that the value of receivables, deducted from the tax base or increasing the loss, are not recognized as tax deductible costs.

If the obligation to apply the bad debt relief in PIT and CIT arises after the liquidation of business, a change in the rules for determining income in relation to special departments of agricultural production or after changing the form of taxation, the reduction / reduction of the tax base / loss is made in:

  • a tax return for the tax year in which the liquidation took place,
  • a tax declaration submitted for the tax year preceding the year in which the form of taxation was changed or the rules for determining income with regard to special departments of agricultural production were changed.

Bad debt relief in PIT and CIT is not applied to commercial transactions between related entities. To sum up, from January 1, 2020, PIT and CIT taxpayers may apply a bad debt relief with regard to unsettled debts. The application of the relief on the part of the buyer who fails to pay the amount due is obligatory. The discount will apply only to commercial transactions documented by an invoice, bill or contract with a payment date after December 31, 2019.