Does the free lending of assets generate income for the entrepreneur?

According to Art. 14 sec. 2 point 8 of the Personal Income Tax Act, the entrepreneur should include the value of received benefits in kind and other gratuitous benefits, calculated in accordance with Art. 11 sec. 2-2b, subject to Art. 21 sec. 1 point 125, i.e. the energy lump sum for veterans.

What is lending

The concept of lending has been clarified in the Civil Code. According to these provisions, lending is a contract by which the lender undertakes to allow the taker, for a specified or indefinite period of time, to use the item given to him for free for this purpose. The subject of such an agreement may be machines, computer equipment, a car and even real estate.

The Civil Code does not reserve any specific form for the conclusion of the loan agreement. For evidence purposes, it is advisable, however, that the contract should be concluded in writing. The actual conclusion of the contract occurs most often by handing over the item to the recipient.

The object of lending can be anything, whether marked as to identity or species, as long as it is suitable for use. Lending may also apply to a component part of the item.

On the basis of the lending agreement, the entrepreneur may use the borrowed property for free in his business. Such free use is definitely a benefit for the entrepreneur, i.e. income from business activity, on which tax should be paid. The taxpayer, based on the general principles of valuation, should determine the value of the asset used and calculate the correct amount of tax.

How to determine the value of a free benefit

Pursuant to Art. 11 the monetary value of benefits in kind, subject to Art. 12 sec. 2, shall be determined on the basis of market prices used in the course of things or rights of the same type and species, taking into account in particular their condition, degree of wear and the time and place of obtaining them.

The monetary value of other free benefits is determined:

• if the subject of the service are services falling within the scope of the economic activity of the service provider - according to the prices applied to other recipients,
• if the subject of the benefits are purchased services - according to the purchase price,
• if the subject of the services is the provision of the premises or building - according to the equivalent of the rent that would be payable in the event of concluding a lease agreement for this premises or building,
• in other cases - on the basis of market prices used in the provision of services or the provision of items or rights of the same type and species, taking into account in particular their condition, degree of wear and the time and place of making available.

If the benefits are partially payable, the taxpayer's income is the difference between the value of these benefits, determined according to the principles set out above, and the fee paid by the taxpayer.

Having to pay tax reduces the attractiveness of borrowing. However, there are situations where no income tax has to be charged on the value resulting from the loan agreement. Pursuant to the PIT Act, the value of benefits in kind and other gratuitous benefits received from persons included in tax groups I and II, within the meaning of the provisions on inheritance and donation tax, is exempt from income tax. This provision means that the lending agreement concluded with persons included in groups I and II does not generate income from economic activity on the part of the entrepreneur who borrows it, and thus no tax obligation arises.

 

The first tax group includes: spouse, descendants, ascendants, stepson, son-in-law, daughter-in-law, siblings, stepfather, stepmother and in-laws. The second group includes: descendants, siblings of parents, descendants and spouses of stepchildren, spouses of siblings and siblings of spouses, spouses of siblings of spouses, spouses of other descendants.

Expenses related to the borrowed property constitute a tax cost

When using fixed assets borrowed free of charge, the entrepreneur may include costs incurred in connection with their maintenance as costs. The condition for such recognition is the actual relationship between the expenses and the revenues earned. In such a situation, a written loan agreement is useful, in which the costs that should be covered by the user will be specified. For example, in the case of a passenger car, these will include costs of operation, maintenance or minor repairs. It should be remembered that these costs cannot be included in costs, e.g. tax on means of transport, insurance costs or other fees related to the ownership or possession of the means of transport. In the case of lending a passenger car, one must not forget about the obligation to keep a record of the vehicle mileage, because thanks to this it is possible to include operating expenses as tax deductible costs.

Lending free of charge is undoubtedly a property benefit and income for the entrepreneur. However, it should not be forgotten that such a contract brings with it both benefits and obligations that must be met in order to safely use free benefits.