Interest on private credit – when is the tax cost?

Entrepreneurs are looking for various forms to finance their activities. One way may be to use the funds from a loan taken by a taxpayer as a private individual. In such a situation, can interest on private credit be considered as tax deductible in business operations? We answer below.

When can interest on private credit be considered a tax expense?

When can interest on private credit be considered a tax expense?

When considering the inclusion of expenses related to private credit in the costs of business, first of all one should refer to the general definition of cost. As stated in art. 22 paragraph 1 of the PIT Act, the costs of obtaining revenues are the costs incurred to achieve revenues or to maintain or secure a source of income, except for the costs listed in art. 23.

The definition provided is very general and broad. However, it can be inferred that in order for a given expense to be considered as a tax expense, it must show a link with the business. This means that if a private loan remains in a cause-and-effect relationship with your business, it can be considered a tax deductible cost. If the private loan is actually allocated to the needs of the business activity, then the expenditure incurred for its repayment may be included in the tax deductible costs. 

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It should be noted that the provisions of the above Personal Income Tax Act does not make it possible to classify as tax deductible costs, expenses related to the drawing and repayment of loans (credits) intended to finance the costs of business activity, the classification or name of loans used by financial institutions, as well as the type of loan. The decisive factor for determining the possibility of including tax deductible costs is the actual purpose of the loan (credit), and not the content of the contract concluded with the bank.

However, it is important to assess whether the expenses incurred meet the criterion related to the income from business activity is whether the loan repayment concerns an entity conducting business activity. The above position is fully applicable when the income tax payer conducts business activity in his own name (individual activity), the expenditure has been financed with a loan which was fully intended to carry out this business activity. For the tax cost to be considered as expenses incurred for repayment of the loan, the type or name of the loan is not important. Only the use of credit funds is of key importance. Example 1.

The taxpayer took a private loan in his name. According to the agreement concluded with the bank, the loan was to be used for consumption. However, the taxpayer decided that all the funds received would be allocated to the needs of his business activity. As a result, the taxpayer will be able to settle expenses on loan repayment as tax deductible costs.

Special conditions for recognizing interest as a tax expense – what are they?

Special conditions for recognizing interest as a tax expense - what are they?

If the taxpayer determines that the expenses for repayment of the loan show the necessary relationship with the business, it is worth referring to the special regulations as to their inclusion in tax deductible costs.

In accordance with art. 23 clause 1 point 8 lit. a) the PIT Act is not considered as tax deductible expenses for the repayment of loans (credits), except for capitalized interest on these loans (credits). In practice, this means that the taxpayer may only include the interest portion of the loan installment as tax deductible costs. Expenses for loan repayment can be included in tax deductible costs only in the part covering interest on the loan. Example 2.

The taxpayer took a private loan and decided to use it for business purposes. The monthly loan installment is USD 2,000, of which the amount to be repaid is USD 1,850 – interest on a private loan is USD 150. The taxpayer may include in the costs the value of interest, i.e. USD 150.

Another recipe to look out for is Art. 23 clause 1 point 32 of the PIT Act. According to its wording, it is not considered as tax deductible costs accrued, but unpaid or forgiven interest on liabilities, including loans (credits). Consequently, only interest actually paid can be recognized as a tax expense. Only interest actually paid on a private loan can be tax deductible in your business. Example 3.

The taxpayer took a private loan and decided to use it for business purposes. The monthly loan installment is USD 2,000, of which the amount to be repaid is USD 1,850 – interest amounts to USD 150. Due to financial problems, the taxpayer did not pay the installment within the prescribed period. Although interest has been accrued, it cannot constitute a tax expense because it has not actually been paid. Shortcuts Settle your business online conveniently!

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Interest on a loan for the purchase of a fixed asset – can it be included in tax costs?

Interest on a loan for the purchase of a fixed asset - can it be included in tax costs?

If a taxpayer allocates money from a private loan for the purchase of a fixed asset used in business activity, he will be able to recognize interest on this loan in tax costs.

However, attention should be paid to specific regulations in this area. As it is commonly known, depreciation charges are made on fixed assets. The basis for their making is the initial value of the fixed asset, which is also influenced by interest on the loan taken out for its purchase. Article 22g para. 3 of the PIT Act directly provides that the initial value of a fixed asset is influenced by interest accrued (and paid) until the date of commissioning the fixed asset for use.

However, according to art. 23 clause 1 point 33 of the abovementioned interest, commission and exchange rate differences on loans (credits) that increase investment costs over the period of implementation of these investments are not tax deductible costs. This provision means that interest cannot constitute a direct cost, but increases the initial value of the investment, from which depreciation write-offs are subsequently made. Interest on a private loan taken for the purchase of a fixed asset increases its initial value until the day it is put into use. After this date, this interest can be directly recognized in tax deductible costs – it must be interest paid. 

To sum up, since the Applicant used the mortgage loan to finance the investment (purchase of the premises entirely intended for the needs of the conducted business activity, which is a fixed asset in this activity), interest on this loan may constitute tax deductible costs of the conducted business activity. It should be remembered that, when included in the tax costs of the abovementioned interest should be paid to the period for which the interest is accrued, because it is he, and not the time when the interest is paid, that is decisive for the purposes of this qualification. Accrued interest payable for the period up to the date of commissioning the fixed asset increases its initial value, and contario – interest accrued after the date of commissioning the asset has no effect on the initial value of the fixed assets. Therefore, interest accrued and paid for the period after commissioning of a fixed asset may be directly included in tax deductible costs.