One of the changes in income tax that came into effect at the beginning of 2020 is the so-called bad debt relief in income tax. Until now, bad debt relief was only applicable for VAT purposes. What is this relief, what conditions need to be met to benefit from it, how is the relief applied in the case of lump-sum income not recorded, and what is the relationship between the relief and the anti-crisis shield?
What is the bad debt relief in income tax?
Sold a product or service? The company issues an invoice, the counterparty pays it, and the company pays tax on the income received. If only it were always that simple, but unfortunately, it’s not always so rosy. Often, clients delay payment, and the tax must be paid, regardless of whether the counterparty has settled. Bad debt relief has long been applied in VAT, and since 2020, it also applies to income tax. It is designed to assist businesses in situations where customers do not pay invoices on time. Thanks to bad debt relief, it’s possible to ‘recover’ the paid tax on a sale for which payment was not received. This can be done within 90 days from the expiration of the specified payment deadline on the invoice or in the payment agreement.
What conditions must be met to apply the bad debt relief?
The tax treatment of the value of unpaid obligations. Bad debt relief in personal income tax (PIT) is possible on the creditor’s side and mandatory on the debtor’s side if:
- The debtor is not in bankruptcy, restructuring, or liquidation proceedings;
- Two years have not elapsed from the end of the calendar year in which the invoice was issued;
- The transaction was conducted within the business activities carried out by both the creditor and debtor, subject to income tax in Poland.
In 2020, bad debt relief can be applied to invoices with payment deadlines expiring before December 31, 2019.
Bad debt relief and the coronavirus
In 2019, there was already knowledge about a new disease, but no one anticipated that it would spread worldwide and also reach Poland. The coronavirus in 2020 almost devastated the Polish economy, primarily due to necessary restrictions to minimize the risk of disease spread. Many businesses suffered, as they faced outstanding debts or were unable to settle these obligations on time. Therefore, the government created the so-called anti-crisis shield, a series of solutions designed to support entrepreneurs and protect them from the crisis associated with the pandemic. One of the solutions available in the anti-crisis shield is the partial withdrawal of bad debt relief. Debtors who meet specific conditions do not have to report unpaid obligations in income tax as part of this relief. They are not required to increase their income when they do not pay certain invoices included in the costs of revenue within 90 days from the payment deadline. To benefit from this solution, a decrease of at least 50% in revenue compared to the same period in the previous year must be demonstrated, along with incurring negative economic consequences due to the coronavirus pandemic.
Overdue payments for a lump-sum taxpayer
In the case of lump-sum income not recorded, the bad debt relief can be applied in the advance payment for the income tax for the month in which the right to calculate or deduct the amount for an unpaid invoice is obtained. In addition to filing a PIT-28 settlement with the correction, the taxpayer must inform the head of the relevant tax office about this correction, providing the corrected amount and debtor’s details. The conditions for eligibility for the relief are the same as in the case of normal tax settlement, with the additional requirement that the payment for the invoice must not be received by the day of declaring.