Abandoned investment in income tax

Service-Tax

In order to make a profit, companies make various investments. However, there are situations when the investment is abandoned. The entrepreneur withdraws from previously undertaken actions and intentions in relation to a given investment. How does a discontinued investment affect income tax?

What is an investment?

In accordance with the Income Tax Act, investments include fixed assets under construction. On the other hand, the Accounting Act defines fixed assets under construction as “fixed assets classified as fixed assets in the period of their construction, assembly or improvement of an existing fixed asset”.

It should be borne in mind that the investment costs are not included in the tax costs until the given fixed asset is put into use. This is due to the fact that the expenditure on the investment in progress increases its initial value at the time of completion of the investment.

Abandoned investment - documentation

Before starting the investment, the taxpayer must take into account that, for various reasons, it may not be finalized. In such a situation, one must take into account the necessity to document that the investment was justified, in line with the conducted activity, and that the abandonment of the investment was justified by important reasons.

The condition for the possibility of including the costs of a discontinued investment in the tax costs is a decision to permanently and definitively resign from the investment in progress.

If the entrepreneur decides to abandon the investment, under certain conditions, he may count the expenses incurred for its implementation as tax deductible costs.

The moment of including the discontinued investment in costs

The Income Tax Act indicates that the costs of abandoned investments are deducted on the date of their sale or liquidation.

Disposal of the abandoned investment

The above provisions generally refer to the sale of a discontinued investment, but its sale may be both remunerative, e.g. sale, and free, e.g. donation.

When selling a discontinued investment, its settlement should be made according to the general rules relating to the sale of fixed assets. Therefore, on the day of disposal of the abandoned investment for consideration, income is generated on this account, and the cost of obtaining this income is constituted by the expenses incurred for the implementation of this investment.

In the case of free transfer of the abandoned investment, it is not possible to count the expenses incurred for its implementation into tax costs.

Abandoned investment - liquidation

There are two dominant positions in jurisprudence when it comes to classifying an abandoned investment as liquidation costs. Well, according to the Director of the Tax Chamber in Poznań of February 1, 2013, no. ILPB3 / 423-445 / 12-4 / KS:

"Liquidation takes place at the moment of the actual, physical annihilation of the investment".

Only then can the expenses related to the investment be charged to tax deductible costs.

However, according to the second view - the judgment of the Supreme Administrative Court of 25 June 2013, file ref. II FSK 2225/11, the condition for including the discontinued investment in the costs is the deletion of a given fixed asset from the fixed assets held.

From the taxpayer's point of view, the second view is more favorable, because the very fact of making a decision to abandon the investment gives the opportunity to include the expenses incurred for its implementation as costs.