Loss for a current fiscal year
December 4, 2017
A company’s loss for a current fiscal year is a surplus of costs incurred in that period over the income. The business’s income may be reduced by the amount of such loss for a given fiscal year. This can be done within five consecutive fiscal years. It should be noted, however, that gained in any of these years may not by higher than 50% of the loss. This stems from the provisions of the Income Taxes on Natural Persons Act (ITNPA) article 9.3 and of the Income Tax on Legal Persons Act (ITLPA) article 7.5.
The five-year period for deducting the loss is the maximum amount of time set forth by the legislature. Any loss not accounted for within such time will not be deducted. However, there are no regulations that would prevent an earlier deduction of the loss, provided this is not done earlier than within the ensuuing 2 years. It is not possible to write off the whole loss in just one year. In general, this may mean that, if a very high income is recorded over the susequent tax years, the loss may be deducted much quicker.
Deducting a sustained loss has no influence upon the form of taxation, so if an entrepreneur who is a natural person changes his taxation mode from tax scale to flat tax, tax on recorded revenue or the other way around, this will not affect the way the loss is accounted. The only exception to the rule is a situation where a tax payer changes the form of taxation from the general taxation principles or tax on recorded revenue to fixed amount tax. In such case, the tax payer will not be entitled to write off the loss.
Example
- In 2015, Mr Smith’s business was subject to a flat tax at 19% rate. Within that tax period, the business incurred some loss. In 2016, Mr Smith then chose to switch to tax on revenue recorded method. In his 2016 return, he will then be entitled to write off 50% of the loss sustained in 2015 from his income taxable on recorded revenue.
- Mr Jones in 2015 conducted his business activity and was subject to 19% flat tax. He too closed the year with a loss, but for 2016 chose to pay the fixed amount tax. In consequence, Mr Jones will not be able write off his 2015 loss in the fiscal year of 2016. If, however, he chooses any other form of taxation for the next years, different from fixed amount tax, than he will be able to account for the loss by the end of 2020 – provided that some income is recorded for that period.
On 27 September 2017 a draft of a bill was presented aiming to amend some of the relevant acts of law, so that the system is simpler to use by entrepreneurs. The Ministry of Development proposes that with the beginning of 2018, losses at the amount of up to PLN 5m can be written off as one single entry, as specified in the added section 3b in article 9 PIT and section 6 in article 7 CIT. The bill should allow business to recover quicker. However, it should also be noted that it will be each entrepreneur’s decision to either take advantage of the new method of writing off losses or not – as the presently applicable principles will still be an option.
The changes assumed in the new ITLPA bill and concerning the distribution of sources of revenue have direct impact on the way losses are written off in companies subject to this tax. This means that a tax payer’s losses from particular sources of revenue do not tot up. This matter is regulated expressly in sect. 3 point 2a. Therefore if a tax payer – as a result of his business activity and other business operations – generates income from only one of these sources, and sustains a loss in another, then subject to the income tax will be the income obtained from that one source, and the loss incurred from the other source cannot be deducted.
Nevertheless, a tax payer will be entitled to deduct such loss incurred in a given fiscal year from a particular source of income (revenue) from his income generated from that source of income (revenue) within the ensuing five consecutive fiscal years, provided that the amount of such deduction in any of these years does not exceed 50% of the loss. By the same token, the method of writing off a loss only in one source of income by reducing the income obtained from the source within the ensuing 5 fiscal years will also be applicable in such situations in which – in a given fiscal year – a tax payer incurs losses in both of his sources of income, i.e. a loss from the source of revenue (income) defined as “capital gains” and a loss in “source” which are the revenues obtained from the remainder of revenue sources.
