Tax Loss - How Long Should You Keep Books?

Entrepreneurs often make a loss when running a business. The tax loss may be settled by them in the following years. How long should they keep accounting documents?

Storage of books - statute of limitations

The length of storage of tax documentation is specified in detail in the Act - Tax Ordinance. Taxpayers obliged to keep books of accounts keep books and related documents until the expiry of the limitation period for the tax liability.

In accordance with the Tax Ordinance, tax books are understood as accounting books, tax book of revenues and expenditures, records and registers, which taxpayers, remitters or collectors are obliged to keep for tax purposes on the basis of separate provisions.

Therefore, in line with the above, tax books and source documents reflecting the entries in these books should be kept for a period equal to the tax liability limitation period.

Let us remind you that the tax liability expires after 5 years, counting from the end of the calendar year in which the tax payment deadline expired.

Limitation of a tax liability means that after a certain period of time - from the moment of the tax liability - the obligation expires, and the tax authority, after the expiry of the limitation period, cannot demand settlement (it is not possible to enforce) the due benefit.

Tax loss - settlement

First of all, it should be pointed out that pursuant to Art. 27 sec. 1 of the CIT Act, taxpayers, with the exception of those exempt from tax, are required to submit a tax return to tax offices according to the established formula for the amount of income (loss) achieved in a tax year - by the end of the third month of the following year. Within this period, you should also pay the due tax or the difference between the tax due on the income indicated in the tax return and the sum of due advances for the period from the beginning of the year.

If the costs of obtaining revenues exceed the value of revenues, the difference is a loss from the source of revenues. It should be remembered here that from 2018, income is divided into those obtained from capital gains and other. Thus, a loss can occur from both capital gains and other income.

The income from a given source can be reduced by the amount of the loss. The amount of the deduction in any of these years may not exceed 50% of the loss generated in a given year.

From 2019, the legislator changed the rules of tax loss settlement. Pursuant to Art. 7 sec. 5 of the CIT Act on the amount of the loss from the source of revenue incurred in the tax year, the taxpayer may:

1. reduce the income obtained from this source in the next 5 consecutive tax years, however the amount of the reduction in any of these years may not exceed 50% of the amount of this loss, or

2. reduce the one-off income obtained from this source in one of the next five consecutive tax years by an amount not exceeding PLN 5,000,000; the non-deducted amount is subject to settlement in the remaining years of this 5-year period, however the amount of the reduction in any of these years may not exceed 50% of the amount of this loss.

Tax loss - verification of the settlement by the tax authority

The right of tax authorities to determine the income of a given tax year may take into account the calculations for losses incurred by the taxpayer in the period of the preceding 5 tax years.

When submitting a declaration on the amount of income achieved in a given tax year in which the losses incurred in the previous period were covered, the taxpayer must take into account that the inspection and verification of this declaration by the tax authority will also extend to economic events in earlier tax years, in which there was a loss covered by the income of the tax year.

Since the loss may be covered from income in subsequent tax years, it is tantamount to the possibility of reducing the tax base, and, consequently, the amount of tax.

Pursuant to Art. 3 point 6 of the Tax Ordinance, tax reliefs are exemptions, deductions, reductions or reductions provided for in the provisions of the tax law, the application of which results in a reduction of the tax base or the amount of tax, with the exception of reducing the amount of tax due by the amount of input tax, within the meaning of the provisions on tax on goods and services and other deductions constituting an element of the structure of this tax.

It should be noted that in any tax or audit proceedings, the subject of which is to determine the amount of the tax liability, the essential issue requiring clarification is the amount of the tax base, which is shaped not only by the revenues and costs of obtaining them in the tax year, but also the tax reliefs to which the taxpayer is entitled, referred to in the above provision.

Thus, in the event of verification, the tax authority should issue a decision determining the taxpayer's loss in a given tax year pursuant to art. 24 of the Act - Tax Ordinance.

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Tax loss and bookkeeping

When settling a tax loss, taxpayers wonder how long they should keep their tax books. In practice, the loss is accounted for over several years.

Example 1.

The taxpayer runs a business in the form of a limited liability company. In 2015, as a result of a change in the business profile, it incurred a loss. The company settled it in the following years. Ultimately, the loss was settled in 2019. Therefore, how long will the company be required to keep tax books?

In the past, tax authorities have argued that the period of keeping the books is longer when taxpayers deduct a loss incurred in a tax year in one of the 5 consecutive tax years.

They believed that the tax books relating to the year in which the loss was incurred should be kept until the expiry of the limitation period for the tax liability for the tax year in which the loss was deducted.

According to the authorities, taxpayers should keep tax books for up to 10 years.

At present, however, the above interpretation line no longer applies. As we have already shown above, in the case of loss settlement verification, the authority issues a determination decision.

Taking this into account, the tax authority may issue a decision determining the amount of the loss until the end of the limitation period. In our case, the limitation period for the 2015 settlement ends in 2021.

Thus, the company should keep tax books only until the end of 2021.

Summarizing, the above position is favorable for taxpayers. The period of keeping the books is counted from the moment of incurring the loss and its proving it in the testimony.