Tax deductible costs - general rules


When running a business, entrepreneurs, apart from generating revenues, also incur various costs related to its functioning. It is worth emphasizing, however, that not every expenditure may be a tax cost.

What expenses may constitute a tax cost?

Pursuant to Art. 22 sec. 1 of the Personal Income Tax Act, tax deductible costs are costs incurred in order to achieve income or to maintain or secure a source of income, with the exception of the costs referred to in Art. 23.

However, the definition is not very clear and unambiguous because not every taxpayer knows what should be understood by the relationship between costs and revenues as well as securing and preserving the source of revenues.

… The relationship between costs and revenues

First, an expense, in order to be a tax deductible cost, apart from the fact that it cannot be included in the catalog of non-tax deductible costs (Art. 23), must also have a cause and effect relationship between the income earned. The cost of obtaining income must be purposeful.

The entrepreneur is also obliged to properly document the incurred expenditure, which will contribute to the objective determination of the conditions for including a given expenditure as tax deductible costs. If the taxpayer does not have the appropriate documents, it is the basis for the tax authority to question the classification of the expenditure as a tax deductible cost. In addition, the entrepreneur, in such a situation, must take into account all kinds of consequences, such as interest or penalties provided for in the Civil Code.

Tax-deductible costs should be related to the appropriate source of income. It is impossible to settle the costs of activity under another source of income, e.g. full-time employment.

It is also worth mentioning that tax costs cannot be properly documented but not actually incurred. An invoice or other accounting document does not document the economic event that has occurred.

… Preserving and securing the source of income

Unfortunately, entrepreneurs will not find a definition of behavior and securing the source of income in the Personal Income Tax Act. Therefore, in order to apply the correct interpretation of the law, it is worth referring to the definition of these two words contained in the dictionary of the Polish language:

  • to keep - to keep something unchanged;
  • secure - provide protection against something dangerous or harmful;

On the basis of the above definitions, it can be concluded that the expenses incurred in order to maintain and secure the source of income are those incurred in order to ensure the continuity of the business activity, so that it brings income in the future.

Distinguish between direct and indirect costs

As already known, the expense, in order to constitute a tax expense, must be incurred in order to achieve revenues. Therefore, two categories of costs should be distinguished: directly and indirectly related to the revenues generated.

Direct costs

This term covers expenses that had a direct impact on the income earned by the taxpayer. As a rule, expenses for the purchase of commercial goods etc.

Indirect costs

As the name suggests, these are expenses indirectly related to the income generated by the company. Such costs are not directly related to the revenues achieved, they can include:

  • company phone subscription,
  • car / machine leasing installments,
  • export of waste,
  • payment for energy, etc.