How do entrepreneurs settle today?
Currently, all entrepreneurs settle PIT tax with the so-called. accrual method. This is regulated by Art. 14 paragraph. 1c of the Personal Income Tax Act, which states that the date on which the income arises is the date on which the property is delivered, the property right is disposed of, or the service is performed, or the service is partially performed. Moreover, the regulations specify that income arises no later than the date of invoice or payment of the amount due.
The current regulations thus lead to situations in which entrepreneurs regularly pay taxes for goods delivered and services performed for which they have not yet received payment. Cash accounting for PIT is a solution to this issue that many will find beneficial. It is worth mentioning that the change will not be mandatory. If the taxpayer believes that the accrual method is more advantageous for his business, he will be able to stay with it without hindrance.
Bad debt relief
A minor solution is already in place to help entrepreneurs in difficult situations resulting from the fact that a counterparty has failed to pay an account receivable. If a taxpayer does not receive payment for a service rendered or goods delivered within 90 days of the due date, he can take advantage of bad debt relief. Unfortunately, this mechanism is subject to certain limitations.
First: the bad debt relief can be used only after 90 days, which means that until then the income will remain unadjusted, and the taxpayer will have to pay tax anyway, with the idea that he may be able to recover the amount paid in the future.
Second: the relief does not apply to companies that are undergoing restructuring, bankruptcy or liquidation proceedings.
Third: taxpayers cannot adjust income if it is taxed abroad.
Fourth: bad debt relief cannot be applied if 3 years have passed since the end of the calendar year in which the sales document was issued.
Cash PIT, or tax on actual income?
Although, as always, the issue is a bit more complicated than it may seem at first, if one wanted to summarize the issue of cash PIT in one sentence, one might be tempted to simplify it just that way. The cash PIT is intended to be a variant in which income tax is collected on actual (received) income, rather than on invoices issued.
Example
Mr. Anthony issued an invoice for the amount of PLN 13,240 with a payment term of 14 days. The invoice date is May 21, so the contractor can pay for the goods received as early as June. In today’s reality, this is irrelevant to PIT – Mr. Anthony will have to pay tax for May, including the income earned from this transaction.
If Mr. Anthony had opted for cash PIT, he would not have had to worry about having to pay tax in May. He would do so only when he receives payment from the contractor.
The introduction of cash PIT is likely to mean not only that the taxpayer will pay PIT upon receipt of payment, but also that the taxpayer will only be able to deduct deduct expenses on the day he receives payment for goods received or services rendered – we will return to this later in the text.
However, the draft amendment to the law provides an exception to the said rule. It’s all about depreciation write-offs – you will be able to include them in the BUI also in a situation where the depreciated fixed asset has not been paid for.
When will cash PIT for entrepreneurs appear?
The Government Legislation Center published a draft amendment to the Law on Amendments to the Law on Personal Income Tax and the Law on Lump Sum Income Tax on Certain Income Earned by Individuals on April 23, 2024. According to the current plan, cash accounting for PIT will become available to businesses on January 1, 2025 (Article 5 of the draft says so).
Who will be able to settle PIT using the cash method?
The draft amendment to the law includes detailed guidelines, according to which entrepreneurs who want to use cash PIT must meet three specific conditions:
- First: a taxpayer may choose the cash method if his revenues from self-employment in the year immediately preceding the tax year did not exceed an amount equivalent to the equivalent of 250,000 euros.
Important!
The draft also included a condition stating that in the case of a business received as an inheritance, income from business activities conducted independently by the deceased entrepreneur shall also be included in income.
- Second: a taxpayer can take advantage of cash PIT provided he does not keep books in connection with his business.
- Third: it is the duty of a taxpayer who wants to settle on a cash basis to prepare a written statement on the choice of the cash basis. This document must be submitted to the head of the tax office, by February 20.
Important!
If an entrepreneur wishes to opt for cash PIT with the opening of a business, he should submit the said statement by the 20th. day of the month following the month of the start of operations.
In addition, it should be remembered that the cash PIT will only be available to entrepreneurs who earn income from business activities they carry out on their own. Thus, this solution does not apply to companies.
What about the income tax settlement method? Cash PIT will be available to taxpayers who settle:
- tax scale,
- flat tax,
- lump sum on registered income.
Also, those benefiting from IP BOX relief will be able to opt for cash PIT.
Restrictions related to cash PIT.
The solution proposed by the Ministry of Finance does not seem to have any weak points – but there is no rose without thorns. While the cash PIT will certainly benefit most taxpayers, it is worth noting the limitations already specified in the bill.
Cash PIT has limits
Cash PIT will not be applicable everywhere. According to current plans, it will certainly not be affected:
- transactions between a trader and a consumer,
- related party transactions,
- transactions with entities, established in a country with harmful tax competition,
- sale of fixed assets,
- sales of intangible assets.
In all the cases mentioned, we will still use the mandatory accrual method.
Trouble with recognizing deductible expenses
Some entrepreneurs may discover that cash PIT is not as beneficial to them as it might seem when they get to the issue of when to recognize deductible expenses. The issue here is the correlation occurring between the moment when revenue is generated and the recognition of the BUI.
Indeed, if we postpone the moment when revenue arises so that it falls on the moment when we receive the receivable related to a given transaction, the logical consequence may be to postpone the moment when we recognize deductible expenses until the entrepreneur makes payment for the ordered goods or services.
As it stands now, the draft amendment to the law stipulates that the date on which revenue is generated is to be considered:
- the day on which the contractor paid for the service or goods,
- the day on which two years pass from the date of the invoice (even if payment has not been received),
- The date of liquidation of the business (if it occurred before a and b).
Summary
Cash PIT may prove to be a solution that will improve the liquidity of small and medium-sized companies in particular. However, it is worth being aware of its limitations and the record-keeping obligations it imposes on a taxpayer wishing to use this method.
Fortunately, cash PIT is to remain a voluntary mechanism, allowing entrepreneurs to make the choice that is best for their business operations.
