Tax deductible costs - exclusions part AND

Knowing the definition of tax deductible costs, widely discussed in the previous part of the cycle on income taxes, it is worth focusing on expenses that cannot be considered tax costs. An extensive and detailed catalog of exemptions was included in the Act of July 26, 1991 on personal income tax (PIT) - Art. 23 and art. 16 of the Act of February 15, 1992 on corporate income tax.

Expenses that are not tax deductible

Expenses incurred in order to obtain income or to secure or preserve the source of income may, in principle, be considered tax costs. However, the regulations provide for situations in which, regardless of the purpose of the expenditure, the expenditure cannot be considered a cost. The entire list of exemptions for natural persons can be found in Art. 23 of the PIT Act (Article 16 of the CIT Act, respectively), however, this article will discuss the most common cases in running a business and raising the most doubts as to recognition as tax deductible costs.

There are various situations in which it will not be possible to classify an expense as tax deductible. Among the most common situations are costs that are not properly documented or have nothing to do with the business. The requirements that must be met by the accounting evidence to be recorded in the tax book of revenues and expenses are set out in § 12 section 3 of the Regulation of the Minister of Finance on the conduct of the KPiR. According to the opinion of the tax authorities, if the confirmation of a given expense meets the requirements of an accounting document, then it may be recognized as tax deductible costs. Hence, for example, the mere confirmation of payment is not a sufficient proof.

When it comes to expenses completely unrelated to business activity, including private ones, they cannot be considered costs because they do not meet the definition of tax costs provided for in the Act.

Fixed assets and land

As a rule, the purchase of a fixed asset and intangible assets cannot be classified directly as tax deductible costs. However, this does not mean that this expenditure cannot be included in the costs. Well, fixed assets entered into the records are subject to depreciation. Therefore, depreciation write-offs are made which consist in the gradual settlement of the value of the property over time. It is they that reduce the revenues earned by the taxpayer.

The situation is different in the case of land acquisition or the right of perpetual usufruct of land (except for perpetual usufruct fees). Pursuant to Art. 23 sec. 1, the expenditure incurred for the purchase of the abovementioned assets cannot be classified as tax deductible costs. However, as it follows from Art. 22c, the land is not subject to depreciation, but the taxpayer has an obligation to enter them into the register of fixed assets. In addition, court and notary fees related directly to the purchase of land increase the initial value of the fixed asset, and become a cost in the case of its sale.

However, in order not to deprive entrepreneurs of the increased costs on this account, only the interest paid on the loan taken to finance the land purchase transaction should be included in them. The only condition is to demonstrate the relationship between the purchased land and the business activity.

Enforcement costs

In a situation where the taxpayer acts as the debtor, he is not entitled to count the enforcement expenses related to the default in tax deductible costs. The entrepreneur will also not increase the costs by the charges resulting from the lost trial, where the court finds the claims justified.

The situation is different, however, when the taxpayer is a creditor of receivables relating to his business. Then, any expenses incurred on this account may be classified as tax costs.

Fines and financial penalties

An important issue is to deprive taxpayers of the right to include fines and penalties in criminal, fiscal, administrative and misdemeanor proceedings, as well as interest on them, as tax deductible costs. Additionally, they cannot constitute tax costs, regardless of the fact ruled by the court whether they were caused intentionally by the taxpayer or not. An example is, for example, penalty interest on late payment of tax liabilities towards the tax office.

Contractual penalties and damages

The legislator also provided for cases where it is impossible to include contractual penalties and damages as costs. In particular, these will be penalties and damages for:

• defects of the delivered goods,
• defects of works and services performed,
• delay in delivering goods free from defects,
• delay in removing defects in goods,
• delays in removing defects in the works and services performed.

An exception may be made when the imposition of a contractual penalty on the taxpayer results from reasons beyond his control in the performance of activities that are the subject of the contract or contract. This position is confirmed by the interpretation of the Director of the Tax Chamber in Łódź of December 29, 2011 (IPTPB3 / 423-302 / 11-2 / PM).

Unpaid or redeemed interest on liabilities

An entrepreneur burdened with interest on unpaid liabilities cannot count them as tax deductible costs, if they are not paid. According to Art. 23 sec. 1, point 32, the cost shall not be considered accrued but unpaid or redeemed interest on liabilities, including loans and credits. An example are notes received with accrued interest for late payment of purchased commercial goods or telecommunications services. They will become a tax cost only when they are paid.

In addition, the expenditure incurred on the repayment of credits and loans also cannot be counted towards tax costs. The exception is the paid capitalized interest imposed on the taxpayer on account of the loan taken, if it was obtained for the purposes of business activity.

Bad debts

Including bad debts as tax deductible costs is possible only if the following two conditions are jointly met:

• the bad debt has been previously accounted for as receivable and
• the irrecoverability has been documented in a strictly defined manner.

Accounting for the tax book of revenues and expenses should be made in the net amount. Otherwise, in the absence of the above circumstances, it is impossible to classify the receivables as tax costs.

In support of the above issue, one can cite the interpretation of the Director of the Tax Chamber in Łódź of March 14, 2013 (IPTPB1 / 415-767 / 12-2 / KO), which stated that redeemed receivables against a related entity may be classified as tax deductible in the amount net, if previously accounted for as receivable. It is worth adding that the debt will be considered canceled if the taxpayer receives information from the debtor that the debt has been released.

Taxes and fees

In accordance with applicable regulations, in particular art. 23 sec. 1 points 12, 43 and 44, the following shall not be deemed to be tax deductible costs:

• income tax,
• inheritance and donation tax,
• tax on goods and services (in this case there are exceptions),
• excise duty on losses of excise goods.

The tax costs also do not include arrears and interest on them charged to the tax office and the Social Insurance Institution.

An important issue with regard to ZUS insurance is the fact that the taxpayer's health insurance premium is not a tax deductible cost. Therefore, it cannot be deducted from the income, as in the case of the others, because its amount is reduced only by the calculated income tax due for the tax office.

In the case of investments in progress, the related taxes will be recognized as tax deductible expenses, but by increasing the initial value of these investments (e.g. tax on civil law transactions when purchasing a component part from a natural person not conducting business). Tax can also be an indirect cost of the enterprise. This is the case when the tax is paid during transitional periods, e.g. when the property (complete, fit for use) is temporarily not used in the business or will be held for sale (it will bring income in later periods). Then it is possible to count the fees and taxes incurred in connection with the maintenance of the property as costs.

An exception was also provided for in the matter of tax on goods and services, discussed in detail in Art. 23 sec. 1 point 43. The most common exception for including VAT as costs is the input tax in the case of entities exempt from entities, as well as the amount of tax due on the import of services and intra-Community acquisition of goods.

The remaining taxes may constitute the cost of the enterprise, but they must be related to the conducted business activity (e.g. tax on means of transport).

Business trip expenses

Pursuant to Art. 23 sec. 1 paragraph 52 to tax deductible costs can not include the value of the allowances for business trips of persons running a business and people cooperating with them - in part exceeding the amount of the allowances due to employees. The current rate for domestic travel has been set out in the ordinance of the Minister of Labor and Social Policy and is PLN 30 per day.

In connection with the above, the entrepreneur may recognize the expenses incurred on meals during a business trip as a tax cost, but only up to the indicated limit. However, it is important that they are properly documented in the form of invoices or receipts.

An important issue is also the inability to deduct VAT for accommodation services. Then the entire gross amount should be recognized as tax deductible costs.