Company tax losses – how to account for them and whether they can be carried forward

What exactly is a tax loss in business?

Let’s start with the basics. A tax loss arises when tax-deductible expenses in a given tax year exceed the revenue generated. This does not automatically mean that the company is in poor financial health – a tax loss and a balance sheet loss are two different concepts. A business may generate positive cash flow whilst simultaneously reporting a loss in its tax return, for example due to high depreciation charges or one-off investments.

The key point is that a business loss is not lost. The legislator has provided a mechanism whereby it can be deducted from income in subsequent years. This is a significant relief that is worth making conscious use of.

How to settle a tax loss – two methods to choose from

The provisions of the Personal Income Tax Act (Article 9(3)–(3a) of the PIT Act) and the Corporation Tax Act (Article 7(5) of the CIT Act) provide for two ways of deducting a tax loss:

Method one – settling the loss over five years. The loss may be deducted from income over five consecutive tax years following the year in which the loss occurred. In any of these years, however, the amount of the deduction may not exceed 50% of the loss. In practice, this means that fully settling the loss using this method will take at least two years.

Method two – a one-off deduction of up to PLN 5 million. From 2019, taxpayers have the option to deduct the loss in a single instalment in one of the next five consecutive tax years – but only up to an amount of PLN 5,000,000. Any amount exceeding this limit may be settled under the general rules (method one).

Carrying forward tax losses – key rules

Carrying forward tax losses to subsequent years is a right, not an obligation, of the taxpayer. This means that a company does not have to deduct the loss if, for some reason, it is not financially advantageous to do so – although in the vast majority of cases it is worth doing so.

A few rules to bear in mind:

A loss may only be deducted from income from the same source from which it arose. If a company’s tax loss stems from business activities, it may only be deducted from income from those activities – not from rental income, employment income or capital gains.

If, in a given year, the taxpayer’s income is lower than the amount of the loss they wish to deduct, they may deduct only as much as their income allows. The remainder is carried forward to subsequent years (within a five-year limit).

Bear in mind the five-year time limit – once this period has expired, the unused portion of the loss is forfeited irrevocably.

Tax loss and form of taxation – PIT and CIT

The rules for settling losses in business activities are similar for both PIT taxpayers (sole traders, partners in partnerships) and CIT taxpayers (corporations, certain partnerships and other legal entities). In both cases, the same five-year period applies, as do the same two deduction options.

However, there are certain differences. CIT taxpayers must bear in mind specific restrictions concerning, for example, company takeovers and mergers – in such situations, the right to deduct losses from previous years may be excluded or limited (Section 7(3)–(4a) of the CIT Act).

CIT taxpayers should also bear in mind one further important rule. Since 2018, corporate income tax has been divided into two separate sources of income: capital gains and other sources of income (Section 7(1)–(2) of the CIT Act). This division has a direct impact on the settlement of losses — a loss incurred in relation to capital gains may be deducted only from income from the same source, whilst a loss from other activities may be deducted only from income from other sources of revenue. Cross-offsetting, i.e. deducting a capital loss from operating income (and vice versa), is not permitted. In practice, this means that a company which has incurred a loss, for example on the sale of shares in another company, cannot use that loss to reduce income from its core trading or service activities. This distinction is particularly significant for companies conducting both operational and investment or holding activities simultaneously — as they may report income from one source and a loss from another, yet will not be able to offset them against each other.

It is worth noting that the right to deduct a tax loss applies both to taxpayers settling their tax liability according to the tax scale (rates of 12% and 32%) and to those who have opted for the flat-rate tax (rate of 19%). A change in the form of taxation between the tax scale and the flat-rate tax does not deprive the taxpayer of the right to settle losses from previous years.

Conversely, taxpayers using the flat-rate scheme on recorded revenue have no possibility of deducting losses at all – the flat-rate is calculated on revenue, not on income. Therefore, if an individual plans to change their form of taxation, they must take into account the impact of this decision on their ability to utilise accumulated losses.

The most common mistakes when claiming tax losses

In practice, several recurring errors are most commonly encountered:

• Exceeding the 50% loss limit in a single year – this is a mistake that may result in the need to amend the tax return.
• Attempting to deduct a loss from income from a source other than the one from which the loss arose. The tax office may challenge such a deduction.
• Lack of documentation – although the loss is shown on your annual tax return, it is worth keeping full documentation of the costs that generated it. The tax authority may verify this even several years later.

Settling tax losses – summary and key points to remember

A tax loss in a business is no cause for panic, but rather an element which – if settled correctly – can realistically reduce your tax burden in the future. The key is to be aware of the mechanisms available to you: the standard settlement (up to 50% of the loss per year for 5 years) or a one-off deduction of up to PLN 5 million. You should bear in mind the deadlines, the correct allocation of revenue sources and the documentation of costs.

Author

Mateusz Sołkowicz

Associate

He specializes in tax law, focusing on the liability of taxpayers, payers and collectors, as well as issues related to income taxes and fiscal criminal law. Her master's thesis, defended at the Department of Financial Law at the University of Warsaw, dealt with tax and criminal liability for tax fraud in income taxes.

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