What expenses can a self-employed person count as a business expense?

Are you starting a business and establishing a sole proprietorship? Are you already an entrepreneur? As a form of settlement with the tax authorities, have you chosen general principles or tax card? Surely you are wondering what expenses a self-employed person can deduct from the tax base. Whether you do your own bookkeeping and invoicing or use the services of a professional bureau, this is knowledge worth having.

What does the income tax law allow?

The legal basis for accounting for corporate expenses is Article 22(1) of the Personal Income Tax Law, which states that "deductible expenses are costs incurred to earn revenue or to preserve or secure a source of revenue, with the exception of expenses listed in Article 23." 

You must be able to demonstrate a cause-and-effect relationship between the expense incurred and the revenue generated from it. In short: the expense must be reasonable and have a direct, clear connection to the type of business you are conducting. The product or service you buy is to be used for professional purposes and as a tool to generate revenue.

Typical expenses of an entrepreneur that you can count as a business expense

It is worth remembering that different expenses are incurred by an entrepreneur depending on the type of business. However, there is a list of expenses that a business owner or self-employed person incurs, regardless of the industry, and which can be thrown into expenses without further ado.

● Rental of office premises

Whether you rent an office outdoors or conduct your business in the premises where you live, you will include expenses for the following in your costs.

Remember that in the latter case, you must indicate the space occupied for the office and include part of the expenses as a proportionate expense. These are:

- rent,

- media,

- Internet,

- furniture,

- office accessories and supplies.

● Purchase of electronic equipment and software

Regardless of your business, you need to purchase electronic equipment and software. You will also deduct these expenses:

 - Computer,

- printer,

- phone,

- operating system,

- MS Office;

- Telephone charges and bills.

Example: You buy two laptops. One for professional purposes and the other for your child to study. You include one laptop, used by you, as a business expense. Operating software or Office software as well. As for specialized software, the ability to count it as an expense depends on the type of business. Thus, if you are a graphic designer, you will count Photoshop or Adobe Illustrator software as an expense, for example, but if you are an accountant it will no longer be a deductible expense. If the expenses for the above equipment and software exceed PLN 10,000, they are subject to depreciation.

● Transportation

Do you have or want to acquire a company car? Do you use carsharing or public transportation services? You will include expenses for:

 - car purchase/leasing,

- Purchase of fuel for the company car,

- car rental by the minute,

- public transportation tickets,

- Charges associated with the leasing contract: initial fee, processing fees, commissions, lease installments, costs of using the leased object (e.g., repairs).

Note: If you use a private car for business, you must keep a so-called mileage record, that is, a detailed inventory of the mileage of the car used for business purposes in a given month. A car entered in your company's fixed asset register can be recognized as a deductible expense by means of so-called depreciation allowances.

● Fees and commissions

Using accounting and financial services, you will count the following expenses as deductible:

- Fees for maintaining a company bank account,

- Interest and commissions for factoring services,

- accounting services.

● Meetings with customers

If your business requires face-to-face meetings with customers and business partners, you can include expenses for organizing and your participation in events in your costs:

 - Meetings at the office or a rented venue,

- Trade fairs and industry conferences,

- business trips.

● Upgrading skills

Being a professional, you expand your knowledge and develop your competence, so you will include the following expenses in your costs:

- courses,

- Training,

- higher education fees,

- professional literature.

● Company promotion

Wanting to reach potential customers and build your company's image, you need promotional tools, which are deductible expenses:

- advertising and PR,

- website,

- business cards,

- flyers.

Cost of hiring employees

As a self-employed entrepreneur, you may enter into civil-law contracts with other persons, i.e. you may employ employees on the basis of: an employment contract, appointment, election, appointment or cooperative employment contract - Article 2 of the Labor Code. As an employer, you are obliged to apply the relevant provisions of the Labor Code. According to the type of contract you have signed (employment contract, work contract, commission contract), you should also fulfill your tax and insurance obligations. Remember that an employee (as an individual) and an employer (as an entrepreneur) are not the same entities. Salaries, in addition to the base, consist of deductible expenses, tax and Social Security contributions, paid by the employee and the employer in the amounts specified by the regulations. Salaries can be an expense of the entrepreneur only if they have been paid. Evidence of payment is, in the case of employment contracts, the payroll, and in the case of a contract of mandate or contract for work, it is a bill.

What are some things you definitely can't deduct as a self-employed person?

According to Article 23 of the Personal Income Tax Law, deductible expenses do not include:

● advance, as it is not definitive;

● acquisition of land or the right of perpetual use of land, with the exception of fees for perpetual use of land;

● interest on the taxpayer's own capital put into the source of income;

● income tax, inheritance tax and gift tax;

● fines and penalties adjudicated in criminal, criminal fiscal, administrative and misdemeanor proceedings, as well as interest on such fines and penalties;

● representation costs, especially those incurred for catering services, the purchase of food and beverages, including alcoholic beverages;

● accrued but unpaid or waived interest on liabilities, including on loans (credits).

For a full list of expenses you can't deduct, click here.

Can you include expenses of a personal nature?

The nature of your business is the criterion that determines whether an expense qualifies as a business or personal expense. Unfortunately, even if a personal expense appears to have an indirect connection to your business, it will not be a deductible expense. You won't put these personal expenses into expenses:

● life insurance;

● medical package and other health care expenses;

● eyeglasses and lenses;

● pool/gym pass;

● a language course for your child;

● decoration in an apartment or house where you are also running a business;

● suitcase and travel luggage;

● travel insurance. 

Example: You buy life insurance. As the name suggests, the coverage extends to every moment of your life, not just the time you are working. The policy is therefore not a tax-deductible expense. Individual tax interpretations indicate in this regard that it is questionable to allocate the funds paid out as compensation, in case of an accident at work. Usually, the injured person uses these funds for medical treatment or rehabilitation, not for company security. It is therefore an expense of a personal nature.

Example: You are furnishing a new office or study. You need to be careful about the value of the equipment, furniture or decorations you have there. You can put up a comfortable couch and table to sit at when you meet with clients and serve coffee in nice cups. However, an invoice amounting to tens of thousands of zlotys for a label of a well-known designer is inadvisable, and will certainly raise doubts in the official's mind. The same goes for photographs or paintings hung on the walls - your favorite work of art by a famous paintbrush will please the eyes, but this expense cannot be charged as a tax-deductible expense.

Spending vs. costs in the age of pandemics

In the wake of the COVID-19 pandemic, the Ministry of Finance has published a document in which you will find, among other things, guidelines on the inclusion of expenses for protective equipment, i.e. masks, visors and disinfectants, as business expenses. Thus, if you incur such expenses to ensure occupational health and safety in your business, or they are the result of top-down recommendations of institutions counteracting the epidemic threat, these expenses are tax deductible.

Can you deduct VAT and how?

If you are an active VAT taxpayer and make purchases, related to your business, you can take advantage of the right to reduce VAT on sales. This is a very complex issue and there are many exceptions here. So each time, consult your accountant to determine whether you can definitely deduct such an expense from VAT.

Remember!

To summarize: for an expense to be deductible, the following conditions must be present together:

● was incurred by the taxpayer;

● is in connection with the taxpayer's business activities;

● was incurred for the purpose of earning revenue or preserving or securing a source of revenue;

● is not an expense listed in Article 23(1) of the Law;

● is definitive i.e. non-refundable;

● was documented in an appropriate manner (VAT bill, invoice, invoice without VAT, advance invoice).

The regulations governing how deductible expenses should be documented are governed by the Regulation of the Minister of Finance on Keeping a Revenue and Expense Ledger.

It is up to you, as an entrepreneur, to decide what is needed for your business. Keep in mind, however, that this may not be obvious to a tax official. To dispel doubts and rest assured, you have the right to request an individual interpretation, which, at the time of a potential audit, will be the basis for including a given expense as a deductible expense.