Why do we not introduce the possibility of accounting for tax losses “retroactively” in Poland ?
As a general rule, tax losses from business activities can be settled "forward" in Poland, by deducting them from income earned in the following 5 years (with certain additional restrictions). However, it is not possible to account for losses "retroactively". However, such a possibility exists in many European countries and the question is whether it should not also be introduced in Poland, writes Michał Thedy, tax adviser, managing partner of Thedy & Partners, in Rzeczpospolita.
Let us start by reminding what a tax loss is. It occurs when tax deductible costs exceed earned revenue. If an entrepreneur has incurred a loss in a given year, he or she may deduct it from the income earned in the future, thus reducing the tax base and tax payable.
The detailed rules for deducting business losses are analogous for companies and individual entrepreneurs (i.e. they are analogous under CIT and PIT).
Rules for loss deduction
Under these rules, a loss incurred in a given year may be deducted from income over five consecutive years. As a general rule, the amount of the deduction in any of these years cannot exceed 50% of the loss from a given year. However, it is possible to deduct a loss from a given year once in one of the five consecutive tax years, provided that the amount deducted does not exceed PLN 5 million. The excess over PLN 5 million is deductible in the remaining years of the five-year period, but cannot be greater than 50% of the amount of the loss incurred. The entrepreneur can choose when to deduct the loss and in what amount within these five years. Obviously, if he has no income in a given year, he will not be able to deduct the loss. It may also happen that he will not earn income in any of the following five years and thus will not be able to deduct his loss.
It is worth adding that entrepreneurs subject to CIT have two sources of income – capital gains and the so-called other (operating) income. Losses incurred in one source can only be deducted from income from the same source. For example, in a trading company, a loss on the sale of shares in a subsidiary (capital gains) cannot deduct income from trading operations (operating income).
Important: To deduct a loss for previous years, you do not have to wait until your annual return is filed. It can be deducted “on the fly” during the tax year by determining the amounts of advance tax payments. Of course, if it turns out in the annual return that the entrepreneur incurred a loss for the whole year, he will not lose the amount of the loss that he deducted “in advances” during the year. This amount will be deductible in subsequent years.
The entire article can be read in Rzeczpospolita of 24 April 2023, pp.: D4-D5