What expenses are deductible for a self-employed person?
Are you starting a business and setting up a sole trader company? Are you a business owner already? Have you chosen general rules or a tax card as a form of settlement with the tax office? You’re probably wondering what expenses a self-employed person can claim in order to reduce the tax base and VAT deductions. Regardless of whether you handle your own accounting and issue your own invoices, or use the services of a professional firm, this is something you ought to know.
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What does the Income Tax Act allow?
The legal basis for the settlement of business costs is Article 22(1) of the Personal Income Tax Act, which states that “tax deductible costs are costs incurred for the purpose of generating revenue, or maintaining or securing a source of revenue, except for the costs listed in Article 23”.
You must be able to demonstrate a cause-and-effect relationship between the cost incurred and the revenue generated from it. In other words: the expense must be reasonable and must have a direct, clear connection with the type of business you conduct. The product or service you buy must serve a professional purpose and be a tool for generating income.
Typical deductible business expenses
It is worth remembering that various expenses are incurred by business owners, depending on the type of business engaged in. However, there are some expenses that a business owner or self-employed person incurs, regardless of the line of business, and which can be deducted as costs without unnecessary debate.
● Renting office premises
Regardless of whether you rent an outside office or run your business from the premises where you live, you can include the following expenses as costs.
Remember that in the latter case, you must indicate the space occupied by the office and include part of the expenses in the costs proportionally. These are:
- accessories and office supplies.
● Purchase of electronic equipment and software
Regardless of the type of business you run, you will need to purchase electronic equipment and software. You can also deduct these expenses:
- mobile phone,
- operating system,
- MS Office,
- telephone charges and bills.
Example: You buy two laptops. One for professional purposes, one for your child to use in school. You deduct only one of the laptops, the one you use for business purposes, as well as the operating system or MS Office. When it comes to specialised software, the ability to include it in the costs depends on the type of business you run. For example, if you’re a graphic designer, you can include Adobe Photoshop or Illustrator, but if you are an accountant, it would not be tax deductible. If the expenses for the above equipment and software exceed PLN 10,000, they are subject to depreciation.
Do you have or wish to acquire a company car? Do you use car-sharing services or public transport? You can include the following in your costs:
- purchasing/leasing a car,
- purchasing fuel for the company car,
- renting a car by the minute,
- tickets for public transport,
- fees connected with the leasing contract: initial fee, handling fees, commission, lease instalments, costs of using the leased item (e.g. repairs).
Note! If you use a private car for business purposes, you must keep a mileage log – a detailed record of the mileage of the car used for business purposes in a given month. A car entered in the register of fixed assets of your company can be included as tax deductible by means of so-called depreciation write-offs.
● Fees and commissions
When using accounting and financial services, you can include the following expenses as tax deductible:
- fees for maintaining a business bank account,
- interest and fees for factoring services,
- accounting services.
● Meetings with clients
If your business requires face-to-face meetings with clients and business partners, you can deduct expenses for organising and participating in such events:
- meetings in an office or rented venue,
- trade fairs and conferences,
- business trips.
● Improving your qualifications
As a professional, you will expand your knowledge and develop your competences; therefore, you can include the following expenses as costs:
- training sessions,
- higher education tuition,
- specialised literature.
● Company promotion
If you want to reach potential clients and build the image of your company, you need promotional tools, which are deductible:
- advertising and PR,
- business cards,
Costs of hiring employees
As a self-employed business owner, you may enter into civil law contracts with other people, i.e. you may hire employees on the basis of: contract of employment, appointment, selection, designation, or a cooperative employment contract – Article 2 of the Labour Code. As an employer, you are obliged to apply the relevant provisions of the Labour Code. Tax and insurance obligations are also required in accordance with the type of contract signed (employment contract, contract for specific work, contract of mandate). Remember that an employee (as a natural person) and an employer (as a business owner) are not the same entities. Remuneration, apart from the base, consists of tax deductible costs, taxes, and social security contributions, paid by the employee and the employer according to the amounts stipulated in law. Wages may be a business expense only if they have been paid. In the case of employment contracts, evidence of payment is the payroll, and, for contracts of mandate or contracts for specific work, the invoice.
What can you definitely not deduct as a self-employed person?
According to Article 23 of the Personal Income Tax Law, deductible costs do not include:
● advance payments, as they are not definitive;
● acquisition of land or the right of perpetual use of land, except for fees for perpetual use of land;
● interest on one's own capital invested by the taxpayer into the source of revenue;
● income tax, inheritance tax, and gift tax;
● fines and penalties imposed in criminal, penal fiscal, administrative and misconduct proceedings, as well as interest on such fines and penalties;
● representation expenses, in particular those incurred for catering services, the purchase of food and drink, including alcohol;
● accrued but unpaid or waived interest on liabilities, including loans.
For a full list of non-deductible expenses, click here.
Can you deduct expenses of a personal nature?
The nature of your business is the criterion determining whether an incurred cost qualifies as a business or personal expense. Unfortunately, even if it seems that a personal expense is indirectly related to your business, it will not be tax deductible. You cannot deduct any of the following:
● life insurance,
● medical package and other healthcare expenses,
● eyeglasses and contact lenses,
● swimming pool/gym pass,
● language course for your child,
● decorations in the flat or house where you simultaneously run your business,
● suitcase and travel luggage,
● travel insurance.
Example: You take out a life insurance policy. As the name suggests, the insurance covers every moment of your life, not just the time you work. The policy is therefore not a deductible expense. Individual tax interpretations indicate in this respect that the allocation of funds paid out as compensation in the event of an accident at work is questionable. Usually, the injured party allocates these funds for treatment or rehabilitation and not to the protection of the company. It is therefore an expense of a personal nature.
Example: You decorate your new office or study. You have to pay attention to the value of the equipment, furniture or decorations you use. You can set up a comfortable sofa and table, where you can sit down during a meeting with a client and serve coffee in nice china. An invoice amounting to tens of thousands of zloty for a well-known designer’s price tag is not advisable, however, and will certainly raise doubts among tax officials. The same applies to photographs and paintings hanging on your walls – your favourite work by a famous painter will be pleasant to look at, but you cannot include this cost as a deductible expense.
Expenses and costs in the age of pandemic
In the light of the COVID-19 pandemic, the Ministry of Finance has published a document in which you will find, among other things, guidelines on classifying expenses on protective measures, i.e. masks, visors and disinfectants, as business expenses. If you incur such expenses to ensure health and safety at work in your business activity or if they result from top-down recommendations of institutions counteracting an epidemic threat, these expenses are tax deductible.
Can you deduct VAT and how?
If you are an active VAT taxpayer and make purchases related to your business, you may exercise your right to reduce your VAT on sales. This is a very complex issue and there are many exceptions, therefore always consult your accountant to make sure that you can deduct such expenditure from VAT.
In summary: for expense to qualify as a deductible cost, the following cumulative conditions must be met:
● it was incurred by the taxpayer,
● it is connected with the business activity conducted by the taxpayer,
● it was incurred to generate revenue or to retain or secure a source of revenue,
● it is not a cost that is listed in Art. 23(1) of the Personal Income Tax Act,
● it is definitive, i.e. non-refundable,
● it is documented in an appropriate manner (VAT invoice, non-VAT invoice, advance invoice).
The rules for how to document tax deductive expenses are set out in the Regulation of the Minister of Finance on keeping a revenue and expense ledger.
You, as a business owner, should decide what is necessary for your business. Remember, however, that it may not be obvious to a tax officer. To dispel doubts and sleep better, you have the right to apply for an individual interpretation, which, at the time of a potential inspection, will constitute the basis for including a given expense in tax deductible costs.