What rules apply to the recording of costs? What documents can form the basis for entries in the ledger?

This article is the second part of the study on recording business events in the tax book. It will discuss issues related to the recording of deductible expenses - based on the interpretations of the tax authorities, concerning issues not directly regulated in the tax legislation and therefore raising the most questions from taxpayers.

Determination of deductible business expenses

Pursuant to Article 22(1) of the p.d.o.f. Act, deductible expenses are all costs incurred for the purpose of earning revenue. Non-deductible expenses are listed in Article 23 of the p.d.o.f. However, the scope of this negative catalog sometimes raises doubts.

Examples:

1. A self-employed taxpayer employs his spouse. This raises the question of whether social security, labor fund and guaranteed employee benefits fund contributions paid in part by the payer in connection with the spouse's employment can be recognized as deductible expenses. From Article 23(1) para. 10 of the Law on p.d.o.f. implies that the value of the taxpayer's own labor, his spouse and minor children cannot be included as deductible expenses. In a letter dated March 21, 2005, ref. DG/415-IX/35-6c/05, the Second Tax Office in Bydgoszcz explained in this regard as follows: "...payments made by you of contributions, due on remuneration paid to your spouse, for social insurance, the labor fund and the fund of guaranteed employee benefits - constitute a component of deductible costs of business activity, subject to recording in column 14 of the tax book of income and expenses."
2. The taxpayer is in doubt as to whether the grace fee he paid is a deductible expense. The Tax Office in Wadowice, in a letter dated November 23, 2004, ref. PD1a/415-37/04, stated in this regard: "...the prolongation fee will be a tax deductible cost provided it is paid together with the principal amount due within the period specified by the tax office when the payment of the tax arrears is spread in installments. (...) regardless of the method of recording in the tax revenue and expense ledger the expenses constituting tax deductible costs, i.e. on the date they are incurred (cash method) or according to the period in which the revenues pertaining to them were obtained (accrual method), the mere issuance of a decision from which the amount of the grace fee and the deadlines for its payment are determined, does not constitute a basis for recognizing this expense as a tax deductible cost. The fee will become an expense when it is actually paid, at which time it should be recognized in column 14 of the ledger - 'Other expenses'."
3. The taxpayer operates a tax warehouse and is engaged in the production of lubricating oils. Semi-finished products used in production (so-called base oils) are purchased under a suspended excise tax regime. With finished products sold to the final customer or trader, the taxpayer is required to add excise tax to the product price, which is the total net price of the product. The excise tax added to the price of the product is paid to the Customs House. The accrued and paid excise tax is part of revenue, and omitting it from deductible expenses makes it at the same time income on which income tax should be charged. So the question arises: will this amount of excise tax be a deductible expense for the taxpayer? In a letter dated March 30, 2005, ref. 1419/UPO-415-35/05/AS, the Tax Office in Plock explained as follows: "Article 23 of the cited Law on p.d.o.f. enumerates enumeratively the expenses that cannot be considered as deductible expenses. It lacks an indication of expenses incurred for payment of excise tax except when excise tax is paid on excessive losses or culpable shortages of excise goods (paragraph 1, item 44). Accordingly, the amount of excise tax paid as shown on the AKC-3 return should be considered a deductible business expense in the s.c. business. The value of the excise tax as a deductible expense, on the basis of a prepared accounting document (internal evidence), should be recorded on the expense side in the tax book of income and expenses kept."

Cash method and accrual method

At what point expenses should be booked depends on the method of accounting for expenses adopted by the taxpayer. These include the cash method and the accrual method. Under the cash method, a taxpayer books expenses as they are incurred. Under the accrual method, a taxpayer accounts for expenses in the period in which it earns income related to the expense.
The cash principle is reflected in the provision of Article 22(4) of the Law on p.d.o.f., according to which deductible expenses are deducted only in the tax year in which they are incurred.
Exceptions to this rule are provided for in Article 22(5) of the Law on p.d.o.f., according to which, for taxpayers who keep accounting (commercial) books, deductible expenses covered by such books are deducted only in the tax year to which they relate.
This means that deductible:

• costs incurred in a given year and related to the revenues of that year,
• costs incurred in years prior to the tax year, but relating to the income of the tax year, and
• costs of acquisition, specified in type and amount, which have been accrued, although they have not yet been incurred, if they relate to the income of the tax year, unless it was not possible to accrue them; in such case, they are deductible in the year in which they are incurred.

The above-described rules of conduct for recording expenses (accrual method) also apply to taxpayers who keep tax revenue and expense ledgers, provided that permanently in each tax year, these books will be kept in such a way as to distinguish the deductible expenses relating to that tax year only.
If the taxpayer has chosen one of the methods indicated above, he is obliged to use this method for the entire tax year. The Tax Office in Plock, in a letter dated April 7, 2005, ref. 1419/UPO-415-21/05/GS, confirmed that: "It is not (...) possible, when posting costs, to apply simultaneously the cash basis (Article 22, paragraph 4 of the aforementioned law) - deducting costs as they are incurred and the accrual basis (Article 22, paragraph 5 of the aforementioned law) - deducting costs in the period to which they relate."
Despite what appear to be clear accounting rules, in practice there are a number of problems in determining when to book expenses, and the interpretations of tax authorities in this regard also vary.

Example:
Beginning in September 2004, the taxpayer received monthly advance invoices for an advertising campaign that, according to the contract, was not completed until 2005. He did not include the paid advances for this service as a 2004 expense. This raises the question: are expenses (paid advances) incurred in 2004 for a service performed in 2005 a deductible expense for 2005, or for 2004? The invoice for the service performed was not issued until 2005. (when the contract was executed).
The First Tax Office Łódź-Bałuty, in a letter dated April 20, 2005, ref. I U SBI-2/415-8/05, stated as follows: "...the expenses (prepayments) for the service incurred by you in 2004 will become tax deductible only when the service is performed in accordance with the contract for the implementation of the advertising campaign, i.e. only in 2005."

Rules for recording costs in the tax revenue and expense ledger

In column 10 of the income and expense tax book, the value of trade goods and materials at purchase prices is entered, and in column 11, the incidental costs of purchase are entered. Column 12 is for recording the costs of non-public representation and advertising (i.e., conducted other than in the mass media or conducted publicly in other ways). Column 13 is for recording the cost of gross wages and salaries in cash and in kind. Column 14, on the other hand, records other costs that cannot be included in earlier columns, including, for example, on account of:

• fuel purchase,
• rent for the premises,
• Electricity, gas, central heating and telephone charges,
• Use of cars not entered in the fixed asset register,
• employee business travel,
• depreciation of fixed assets,
• Employees' pension and disability insurance premiums in the part financed by the employer and employees' accident insurance premiums,
• Interest on loans and borrowings,
• purchased equipment,
• public advertising.

Column 15 is for entering the total amount of expenses indicated in columns 12-14.

Examples:

1. The taxpayer is in the business of freight transportation. Performing tasks in the field of transport and forwarding, the taxpayer subcontracts transport services to subcontractors. In this situation, the question arises: are these purchases subject to recording in the tax book of income and expenses in column 10, or in column 14? In a letter dated March 11, 2005, ref. 05/PD/0090/1-7/A/05, the Tax Office in Bystrzyca Klodzka indicated as follows: "...purchases of subcontractor services as other expenses are recorded in column 14 of the tax income and expense ledger - because column 10 of the tax income and expense ledger is a closed catalog and is used only to record the purchase of materials and commercial goods."
2.  The taxpayer, in the course of his wholesale trade in plastic products (e.g., garbage bags, plastic bags, shrink wrap, etc.), repackages some of the purchased goods into smaller cartons and applies his labels, incurring expenses that are booked on the expense side of the income and expense ledger. The taxpayer is in doubt: how should the above expenses be accounted for? The Tax Office in Środa Wielkopolska, in a letter dated September 19, 2004, ref. DF-415/10/2004, stated as follows: "...cardboard boxes and labels purchased by the taxpayer should be included in other costs related to the sale of commercial goods and booked in column 14 of the ledger, as treating them as basic or auxiliary materials would be possible in the case of the taxpayer's production of the said plastic products."

Documenting expenses

The basic accounting evidence is:

• VAT invoices, in particular VAT margin invoices, VAT RR invoices, VAT MP invoices,
• customs documents,
• bills and
• correction invoices and correction notes.

Accounting evidence is also considered:

1. daily statements of evidence (sales invoices) prepared for posting them with a summary entry;
2. accounting notes, prepared to correct the entry of an economic operation, resulting from a foreign or own proof, received from the taxpayer's counterparty or transferred to the counterparty;
3. evidence of transfers;
4. proofs of postage and bank charges;
5. other evidence of payments, including those made on the basis of fee books, and documents containing data that are required for accounting evidence.

Accounting evidence also includes internal evidence (what types of events can be documented by internal evidence are specified in § 14 of the Decree of the Minister of Finance on keeping a tax revenue and expense ledger), as well as other relevant documents.

Examples:

1. The taxpayer is in the business of buying scrap gold. So the question arises: how should the records of gold scrap purchase be properly documented in the tax book? The First Tax Office in Bialystok, in a letter dated December 30, 2004, ref. PBI/443-40/HK/04, explained as follows: "In paragraph 2 of § 14 of the aforementioned regulation, the legislator enumerates enumeratively the expenses that may be documented by internal receipts. The provision of para. 2 pt. 6 of § 14 of the aforementioned regulation stipulates that an internal proof cannot be an accounting document, which is the basis for making an entry in the ledger, when purchasing non-ferrous metals, which include gold. Thus, The accounting evidence may be a civil law contract, if it will contain the information listed in § 12, 13 and 14 of the Ordinance on Keeping a Tax Revenue and Expense Book."
2. A taxpayer, who conducts business and settles income tax on a general basis, intends to rent from a non-business individual a commercial premises in which to conduct business. The landlord will not issue a bill, but only a proof of payment. What, in this situation, can be the basis for entries in the tax income and expense ledger? The Tax Office in Glogow, in a letter dated January 5, 2005, ref. PD.I/415-42/04, stated as follows: "proof of rent payment (bill, transfer order, KW receipt, receipt or confirmation of payment in writing) containing the data referred to in Paragraph 12(3)(2) of the aforementioned Ordinance on keeping a tax revenue and expense ledger, in conjunction with the lease agreement for the premises, which shows that the bearer of the expense is a business person, provides the basis for making entries in the tax ledger.„
3. In order to increase sales, the taxpayer pays cash bonuses to trade contractors depending on the volume of sales, according to the contract. These expenses are tax deductible. This raises the question: how should such a transaction be documented when recording it in the tax revenue and expense ledger? The First Tax Office in Bialystok, in a letter dated January 18, 2005, ref. PBI-3/415/89/JS/05, explained as follows: "In the situation presented, when the cash bonus paid is a deductible expense, the accounting evidence underlying its inclusion in the tax ledger is an accounting note.„

Legal basis: the Act of July 26, 1991 on personal income tax (consolidated text, Journal of Laws No. 14, item 176, as amended), the Regulation of the Minister of Finance of August 26, 2003 on keeping a tax income and expense ledger (Journal of Laws No. 152, item 1475, as amended).