Even if you respond to the accountant by phone to the word “tax-deductible” or “taxes”, it would be good for you to know the most important rules for including interest and other costs in loans.
It is true that these rules are generally simple, and the conditions for including it costs quite obvious. But taxes would not be taxes if they did not hide potential surprises. It is worth knowing about them in advance so that you do not find yourself in a situation where the accountant will clear you away and you will pay more tax than you could.
In the case of a sole proprietorship, the costs of interest and fees associated with credit, from a tax point of view, do not differ much from other costs of doing business. The rules for their “tax deduction” (actually, reducing their tax base) are almost the same as for other expenses.
Interest and commissions – are they tax-deductible?
For the record, let’s remind you: a given cost can be considered as a tax-deductible cost when – as art. 22 of the Personal Income Tax Act – is “incurred in order to achieve income or to maintain or secure a source of income”. In the same art. 22 there is also an additional condition: the cost cannot be on the list of exceptions, which in turn is included in art. 23 of the Act.
Fortunately, there is neither interest nor other borrowing costs on this list? Credit or borrowing costs, such as commission or interest, so you can treat virtually the same as all other costs.
Interestingly, the cost of obtaining income does not have to be the cost of a company loan – it can also be the costs of … consumer credit for individuals, if it is used for business purposes. Small entrepreneurs sometimes take advantage of this opportunity, because a company loan in a bank is often simply not available to them.
It should be remembered that if the given costs are not on the list of exceptions listed in art. 23 of the Personal Income Tax Act, this does not mean that they can immediately be included in tax-deductible costs. The tax authorities, as well as the case-law of administrative courts, take the view that, in order for expenditure to be deductible, the following conditions must also be met:
– such a cost should be borne by the taxpayer, i.e., in the final analysis, it must be covered from the taxpayer’s property resources (not taxpayer’s tax-deductible expenses that were incurred on the taxpayer’s activities by persons other than the taxpayer),
– it is final, i.e. real, so the value of the expenditure incurred has not been reimbursed to the taxpayer in any way;
– incurred in order to obtain, retain or secure revenues or may affect the amount of revenues achieved;
– has been properly documented.
In case of doubts as to the possibility of including a given expense as tax-deductible costs, it is worth submitting an application for an individual tax interpretation in which the tax authority will state in a particular case, i.e. the facts regarding the taxpayer as to the application of tax law.
The interpretation will also provide protection for the taxpayer in the event of a tax audit. An application for an individual interpretation may relate to the actual state in which the taxpayer is in a given moment or future, which according to the taxpayer is yet to occur. Therefore, withdrawal from the abovementioned application and obtaining a binding interpretation of tax regulations allow to a large extent to plan and reduce tax risk in business.
Loan for any purpose? Yes, as long as it is not intended for any purpose
Here, however, lies the first catch associated with credit costs being deducted from tax-deductible expenses. On the one hand, consumer loan costs can be recognized as tax-deductible costs, but on the other, it is not the case that every company loan qualifies for its costs as tax-deductible costs. The decisive criterion is not the name of the contract but the actual purpose of the loan.
Fortunately, a very good indicator here is simply common sense. If you really spend the company loan on the needs of the company – purchase of goods, equipment, software, etc. – everything will be all right.
But if you take a company loan of 50,000, and then stick a card on the door to the company, “closed, I went to Hawaii, I’ll be back in 2 months”, and a representative of the Tax Office will come to you, let’s put it this way: after two months you will has had at least two months of control?
Income tax costs for an investment loan
An investment loan is another potential problem. Here, it is true that the entire interest and cost of the loan will eventually go to costs, but the key is the word “ultimately”. In the case of investments, all related expenses that are incurred before entering the item (machinery, equipment, etc.) in the fixed assets register are not recorded as costs, but increase the value of the investment.
This also applies to credit costs. Only interest (or other fees) which become due only after entering a given item in the fixed assets register directly go to the costs. Earlier interest and fees will gradually turn into costs only with depreciation.
IMPORTANT NOTE: in the case of interest and commissions, the date of their calculation is important. If the interest accrual date was before entering the subject of the investment in the fixed assets register, then even if you delay the transfer (which of course we do not recommend for obvious reasons), you will not gain anything. Interest will increase the value of the investment object anyway and will not go directly to costs.