Bad debt relief in CIT and PIT: A complete guide
Bad debt relief in CIT and PIT is a crucial tool that can be used by the taxpayers to minimize losses arising from unfair practices of the contractors who fail to pay their liabilities on time. Thanks to the relief, taxpayers may avoid paying taxes charged on unpaid invoices that would normally overstate the revenue. In this article, we will discuss in detail the legal regulations, rules and conditions for the use of the bad debt relief.
Legal regulations concerning the bad debt relief
Starting from 1 January 2020, a new act has been applicable – the Act of 19 July 2019 on change certain acts to reduce payment clogs (Polish Journal of Laws of 2019, item 1649). The said act introduced the possibility of utilizing a bad debt relief in personal income tax (PIT) and corporate income tax (CIT). It works under principles analogous to the bad debt relief in VAT.
A new article 18f was introduced in the Act on CIT to regulate the matters concerning the bad debt relief with regard to corporate income tax. A similar solution has been provided for in the Polish Act on PIT, in Art. 26i.
What are the rights of the creditor?
The use of the relief is the creditor’s right, not an obligation. The creditor may reduce the tax basis or increase the loss by the debt that has not been paid and 90 days lapsed from the payment deadline. The action must be carried out in the income statement for the year in which the payment deadline expired.
In a situation when the value of overdue receivables exceeds the taxpayer’s income, the reduction can be carried out in the next years but for a period not longer than three years from the end of the fiscal year in which the right to the reduction became available.
Obligations of the debtor
If the liability is classified as a tax-deductible expense, the debtor must make an adjustment. This condition does not apply in a situation when the debtor makes the payment by the last day of the month in which the period of 90 days from the date of payment lapse. The debtor must increase the income already at the stage of calculating the advance payment for the income tax.
Conditions to use the bad debt relief
In order to utilize the bad debt relief in CIT and PIT, three conditions must be met:
- Invoices, bills and agreements subject to the relief must be concluded by taxpayers whose revenue is being taxed in Poland.
- The debtor must not be under liquidation, subject to pending bankruptcy proceedings or restructuring. The status must be verified as of the last day of the month preceding the month in which the creditor submitted the income statement.
- No longer than two years lapsed from the end of the calendar year in which the agreement was concluded or the invoice was issued by the creditor.
If the above-mentioned conditions are not met, there is no possibility for the utilization of the bad debt relief.
Adjustment of settlements after payment of the receivables
If the payment is settled (either in full or partially), both parties – the debtor and the creditor – must make adjustments in their settlements.
Exceptions concerning transactions between associated entities
The bad debt relief does not apply in case of trade transactions between related entities, pursuant to Art. 11a section 1 point 4 of the Polish Act on corporate income tax.
Conclusion
The bad debt relief for CIT and PIT serves as an important tool which allows protecting the taxpayers’ interests in situations when their contractors fail to pay the receivables. Thanks to the knowledge in regulations and conditions needed to apply them, taxpayers may effectively manage their finances by minimizing the risk connected with unpaid invoices. The automation of accounting processes and the constant monitoring of changes in regulations are of key significance for the efficient use of the relief described in this article.
Author: Maria Koza, Junior Accountant at the MDDP Outsourcing office in Warsaw
