Business liquidation and cost adjustment

The adjustment of costs consists in excluding from tax deductible expenses expenses related to liabilities not settled within the period specified by the legislator. If the business goes into liquidation, the trader should know how to properly settle the then unpaid invoices and whether a cost adjustment should be applied to them. What is business liquidation and cost adjustment? It should also be remembered that the cost adjustment is valid only until the end of 2015, but there are also transitional provisions regarding it.

Business liquidation and cost adjustment

Regulations regarding the correction of costs in connection with the failure to settle the liabilities towards contractors on time are included in Art. 24d of the Personal Income Tax Act. If we include unpaid liabilities as tax deductible costs, then the adjustment of costs is applied accordingly, if:

• the expense has not been paid within 30 days from the payment date, if the time limit specified in the invoice (bill) is shorter than 60 days (Article 24d (1)),

• the expenditure has not been paid within 90 days from the date of including this amount as tax deductible costs, if the deadline specified in the invoice (bill) is longer than 60 days (Article 24d section 2).

The provisions on the correction of costs also oblige taxpayers who liquidate business activity - it is stated in art. 24d paragraph. 10 of the PIT Act. The legislator indicated in it that the adjustment of costs applies if the above-mentioned deadlines expire after the liquidation of business activity, and the decrease or increase in tax deductible costs or increase in revenues takes place for the tax year in which the business was liquidated.

Accordingly, the following options for a cost adjustment may apply:

• reduction of tax deductible costs before liquidation of the activity and settlement of these liabilities after its liquidation,

Example 1.

In January 2015, the entrepreneur reduced the tax deductible costs in connection with unpaid invoices. In February 2015, it went out of business, and made payments for the liabilities previously covered by the cost adjustment in March and May.

Due to the settlement of liabilities, the increase in tax costs should be made in the last month in which the business was conducted, i.e. in February 2015.

• at the time of liquidation of the activity, the taxpayer included unpaid invoices in the expenses, the payment deadline follows the liquidation of the activity.

Example 2.

In connection with the liquidation of the business, if the taxpayer has outstanding liabilities to contractors and fails to pay them on time, he should recognize them as a reduction in tax costs in the month of the business liquidation.

However, if the taxpayer pays these fees on time, no cost adjustments should be made.

Cost adjustment and liquidation physical inventory

The adjustment of costs applies to all liabilities resulting from the failure to pay them within the time limits provided for by the legislator. It should be borne in mind here that entrepreneurs who keep a tax book of revenues and expenses are obliged to make an inventory of the nature of commercial goods, basic and auxiliary materials (raw materials), semi-finished products, work in progress, finished products, shortages and waste as at the date of liquidation of economic activity, and enter to the book (Ordinance of the Minister of Finance of August 26, 2003 on maintaining the KPiR).

When drawing up the physical inventory and making its valuation, the stock of commercial goods, materials, semi-finished products, work in progress, shortages and waste should be reduced by the liabilities unpaid for their purchase (§ 29 section 4a-4b of the Regulation of the Minister of Finance on the conduct of the KPiR ). The value of physical inventory is included in the calculation of income - it causes:

• decrease - if the initial inventory is higher than the liquidation inventory,

• increase - if the initial inventory is lower than the liquidation inventory.

Such a procedure results in the fact that, through the physical inventory, there is a correction of tax costs in connection with the goods and materials unsold as at the date of liquidation. Therefore, it should be remembered that failure to pay the expense for the goods included in the inventory will not result in the need to make an adjustment of the cost under Article 24d, because, because the taxpayer would include them twice:

• through liquidation inventory,

• by correcting unpaid expenses

and thus the tax base would be overestimated.

When liquidating a business, attention should be paid to what liabilities the cost adjustment is applied to. In the case of expenses that will not be included in the physical inventory, and the taxpayer has not paid them on time, they reduce tax costs. If the settlement of these liabilities takes place after the liquidation of the business, tax deductible costs should be increased in the month in which the liquidation took place. However, if it concerns expenses covered by the liquidation inventory, then no cost adjustments should be made, as it would lead to an overstatement of the tax base.

Cost correction and change of regulations

Pursuant to the act on amending the act - Tax Ordinance and some other acts signed by the president, Art. 24d of the PIT Act. Therefore, from January 2016, entrepreneurs will not have to reduce tax deductible costs by expenses not paid within the statutory deadline, and thus make cost adjustments.

Pursuant to the transitional provisions, if the taxpayer repays the liabilities in 2016 and has made an earlier adjustment of the costs, he will be able to count them again as tax deductible costs at the time of payment.

On the other hand, in a situation where the entrepreneur had previously derecognised invoices in connection with the application of cost adjustments, and their payment took place after the liquidation, he should go back to the last month in which the business was conducted and increase the costs of obtaining revenues.

Example 3.

In November 2015, the entrepreneur reduced the tax deductible costs due to unpaid invoices. In January 2016, he closed down his business, while payments for liabilities previously covered by the cost adjustment were made in February and March 2016.

Due to the settlement of liabilities, the increase in tax deductible costs should be made in the last month in which the business was conducted, i.e. in January 2016.

However, if on the date of liquidation of business activity in the year in which the cost adjustment is no longer applicable, the entrepreneur would have any unpaid liabilities, he no longer adjusts the costs as at the date of liquidation.