How to determine the amount of business income and the date on which the income arose? What are the rules for recording revenue in columns 7, 8 and 9 of the ledger?

Despite the fact that the income and expense ledger has long been used to record economic events, and therefore the rules for its maintenance should be familiar to taxpayers, many questions still arise in this regard. In this paper - based on the explanations of tax authorities - the most common doubts raised by taxpayers regarding income are included. As it turns out, they relate not only to the ways of recording revenue in the ledger, but also to the moment when revenue arises, and even to the very essence of revenue, which gives rise to uncertainty as to whether a given receivable should be entered in the ledger at all. Separate papers, however, will discuss issues relating to expenses (costs) and the evidence on which ledger entries are based.

Determination of business income

Pursuant to Article 14(1) of the Law on p.d.o.f., income from business activities is considered to be amounts due, even if not actually received. However, it is not always clear to taxpayers what is taxable income, requiring posting in the tax revenue and expense ledger.

Examples:

1 A taxpayer who runs a commission is in doubt about what amount constitutes income for him and how it should be recorded in the tax ledger.

In a letter dated October 19, 2004, ref. PD1/415-12/04, the Tax Office in Wieliczka explained in this regard as follows: "The commissionaire does not incur any expenses for the acquisition of the goods displayed in his commission. This is because he does not actually acquire them. Therefore, there are no deductible expenses for the mere acceptance of the goods on consignment. For the same reasons, the commissionaire's income (for personal income tax purposes) is only the portion (corresponding to the commission, the margin) of the amount due that is paid by the person who buys the goods on consignment, according to Article 14(1) of the P.D.O.F. Law.

In view of the above, at the commission agent the amount due under the commission agreement is the commission (margin) less value added tax. The manner of keeping a tax revenue and expense ledger is defined by the Decree of the Minister of Finance dated August 26, 2003, where, according to par. 3 para. 2, the purchase price is the price the buyer pays for the purchased assets. On the other hand, according to par. 3 item 6 of this regulation, revenue is income within the meaning of the Income Tax Act. Thus, the commission received less the value-added tax due should be entered in column 7 of the tax revenue and expense ledger. In column 17 (remarks), you can put the specification of the invoice on the basis of which the income was obtained."

2 The taxpayer is engaged in the business of real estate appraisal. At the same time, she performs real estate appraisals on the basis of a work contract. In this situation, the question arises: how should the income received from work contracts be treated?

The Swidnica Tax Office, in a letter dated October 1, 2004, ref. PDI-415/39/04, explained in an analogous situation: "In the event that the scope of real estate appraisals performed by you (...) falls within the scope of your business activity, the settlement cannot be performed under a contract of mandate or contract for work. In this case, the amount received for the performance of the service constitutes your business income in accordance with Article 14 of the Law on p.d.o.f. and should be entered in the tax book of income and expenses. Since you are a VAT taxpayer, your income will be the net amount (after deducting VAT)."

3 The taxpayer has received an advance payment for the delivery of goods, and therefore doubts whether he should report it as revenue. However, in accordance with the provision of Article 14(3)(1) of the P.D.O.F. Act, collected advance payments for the supply of goods and services do not constitute revenue for the taxpayer.

Date of revenue generation

Pursuant to Article 14, paragraph 1c of the Law on p.d.o.f., the date on which income arises is considered, subject to paragraphs 1e-1g, to be the date on which the invoice (bill) is issued, but no later than the last day of the month in which:

1. an item was issued, a property right was disposed of or
2. a service has been rendered, including partial performance of a service, if its partial performance constitutes a title to payment under the contract or separate regulations, or
3. payment for performance was received - in other cases.

Accordingly, if a taxpayer performed a service in September 2005, and did not issue an invoice for the service performed until October 5, 2005, income due will arise in September 2005. Doubts arise, however, with regard to services of a continuous nature, when payment for their performance was made in the first month of their performance.

Example:

The taxpayer is engaged in business activity in the field of teaching foreign languages, settling accounts on the general basis. The question is how and when the income received in accordance with the bill issued in October 2004 for teaching a foreign language - for the period from October 2004 to June 2005 - should be recorded in the tax book of income and expenses. (This bill was paid in October 2004).

In a letter dated December 30, 2004, ref. PB-I/415/32/IH/04, the First Tax Office in Bialystok stated: "As is clear from Article 14(1c)(2) of the P.D.O.F. Act, quoted above, business income arises when the service is performed or partially performed, with the circumstance of payment for the unperformed service having no impact on the determination of the moment when it arises. This means that the settlement of revenue should take place in the month (fiscal year) of the service or its partial performance. In the case of continuous services, which include educational services, partial performance usually occurs after the end of the month of study." According to the above, therefore, the calculated amount due for the service actually performed in a given month should be considered as revenue in a given month.

Posting on date of invoice

However, it should be noted that for taxpayers who:

• are taxpayers of goods and services tax not exempt from this tax and
• maintain a tax revenue and expense ledger, and
• record revenue on the date of the invoice, in accordance with the provisions of the VAT Law,

the date on which the invoice is issued is considered to be the date on which the revenue arises (Article 14, paragraph 1f of the VAT Act). If, on the other hand, the invoice is not issued within the period specified in the VAT Act, the date on which the invoice should have been issued is considered the date on which the revenue arises.

Thus, the legislator has departed in this case from the principle of recording revenue on the date of issuance of goods or performance of services. A VAT taxpayer, keeping a ledger, records revenue on the date of the invoice even if the performance of the service or the issuance of the goods took place earlier. If the invoice is not issued on time (according to the provisions of the VAT Law), revenue should still be recognized no later than the date on which the invoice should have been issued. Thus, if a VAT taxpayer maintains a tax revenue and expense ledger and performed a service in August 2005, for which he issued an invoice on September 2, 2005, then revenue due arises for him in September and he should record it in the ledger in that very month.

If the performance of a service or the delivery of goods took place in December of a given fiscal year, and invoices relating to these events will be issued in the following year, the last day of the fiscal year in which these events took place shall be considered as the date on which revenue is generated.

Example:

As part of his business activity, the taxpayer provided consulting services in the field of technical preparation of production, taxed under the general rules. He issued an invoice for the services performed in December on January 4, 2005.

The Tax Office in Lubartow in a letter dated March 23, 2004, ref. DP1-415-4/04 stated in an analogous situation: "(...) in the event that the performance of services took place in December of a given fiscal year, and invoices relating to these events, in accordance with separate regulations, will be issued in the following year, the last day of the fiscal year in which these events took place shall be considered to be the date on which revenue is generated." Therefore, the invoice issued on January 4, 2005 should have been recorded in the tax revenue and expense ledger under the date of December 31, 2004.

Revenue from rental, lease, leasing contracts

Revenues from rental, lease, leasing or other contracts of a similar nature, the subject of which are assets related to business activities, are considered to be revenues due determined as of the date on which receivables under such contracts become due and payable.

Example:

The taxpayer is engaged in a non-agricultural business activity taxed on a general basis. As part of his business, he rents two premises from another person. The question arises when income arises from the sublease of premises, in the case of concluding a sublease agreement on September 20, 2005. - for a period of 6 months, with the payment of rent 7 days from the date of signing the contract?

In a letter dated March 15, 2005, ref. P-3-415/1b/05, the First Tax Office in Lublin explained: "Due for payment is an unspecified concept in tax law. The phrase maturity refers to the last day on which contractual payment should occur. Therefore, analyzing simultaneously the referenced provision and the meaning of the word due, it can be concluded that in order to determine the moment when income arises from rental contracts provided in the course of business, the decisive factor is not the date of issuance of the invoice, but the designated date of payment of rent (due date of payment of rent), i.e. the date on which the landlord can demand payment of the rent due to him."

Thus, in the case at hand, income from the sublease will arise on September 27, 2005.

Revenues from energy, telecommunications and utility services

In the case of settlements on account of:

1. supply of electricity, heat or line gas,
2. Provision of telecommunications, radio communication services, except for services paid for by tokens (coins) or cards, including telephone services,
3. water distribution services, wastewater management, and waste collection and disposal,

The date on which revenue is due is considered to be the due date resulting from the invoice, and if the due date is not specified, the last day of the month in which the invoice was issued (Article 14, paragraph 1g of the Law on p.d.o.f.).

Rules for recording income in a tax revenue and expense ledger

Taxpayers' questions also relate to making entries in the various columns of the income and expense ledger. On the revenue side of the tax revenue and expense ledger, there are three columns. Column 7 records the value of goods and services sold, column 8 is for recording other income, and column 9 records the total amount of income recorded in columns 7 and 8.

Examples:

1 The taxpayer is the owner of a trade and service enterprise. He has entered into a verbal representative agreement with a foreign entrepreneur, under which he will be the representative of this entrepreneur in Poland. His duties as a representative will consist of finding buyers for this entrepreneur's goods and forwarding orders. The remuneration for this will be a percentage commission on the value of the goods purchased by the buyers he finds. In this situation the question arises: how to properly record commission income?

The First Tax Office in Kalisz, in a letter dated May 26, 2004, ref. PD-I/415-42/13/04, explained as follows in an analogous situation:"...within the framework of your commercial activity, you will additionally provide services on the basis of the concluded contract, consisting in searching for buyers and forwarding orders. Therefore - in accordance with point 7 of the explanatory notes to the tax book of income and expenses, constituting Appendix No. 1 to the Regulation of the Minister of Finance on keeping a tax book of income and expenses, the appropriate column for entering these revenues will be column 7, in which revenues obtained from the sale of products (trade goods) and the sale of services are recorded."

2 The taxpayer is engaged in the business of fuel trading, taxed under the general rules. He is a taxpayer of tax on goods and services. In the course of his business, the taxpayer occasionally leases equipment covered by the fixed asset register. The question is whether, for the service of leasing a fixed asset, he should issue a VAT invoice and record the income in column 8 of the tax revenue and expense ledger as other income?

In a letter dated April 7, 2005, ref. USP-IA/3/05, the Tax Office in Bialogard stated: "Pursuant to Article 14(2)(11) of the p.d.o.f. Act, income from business activity also includes income from rental, sublease, lease, subtenancy and other contracts of a similar nature, of assets related to business activity. According to the explanatory notes to the tax income and expense ledger contained in the Decree of the Minister of Finance on keeping a tax income and expense ledger, column 8 of the p.k.p. and r. is intended for the entry of other income, e.g. income from paid disposal of assets, received contractual penalties, remuneration of the payer. In view of the above, income from the lease of business-related assets is business income and should be reported in column 8 of the tax income and expense ledger - other income."

Legal basis: Act of July 26, 1991 on personal income tax (Journal of Laws No. 14, item 176, as amended), Decree 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).