Non-Deductible Expenses

Understanding the non-deductible expenses catalogue is important for every taxpayer. It helps to avoid errors in tax settlement and reduces the risk of tax inspection. We will explain what non-deductible expenses are and what components they include. Find everything you need to know about non-deductible expenses in this article.

What are non-deductible expenses?

Non-deductible expenses are the ones that a taxpayer cannot deduct as tax-deductible costs. These are the expenses that:

• are not related to the conducted business activity,
• do not contribute to generating income.

This means that they cannot reduce the tax base subject to income tax.

Catalogue of non-deductible expenses

The catalogue of non-deductible expenses is closed. The following Acts define it:

• Personal Income Tax Act (PIT),
• Corporate Income Tax Act (CIT).

Examples of non-deductible expenses

We can distinguish several key categories of non-deductible expenses:

1. Contractual penalties and compensations:
   • fines and compensations related to defects in goods, works, and services, delays in delivery or removal of defects,
   • various types of fines, enforcement costs, and budgetary interest.
2. Taxes and fees:
   • income tax, inheritance and gift tax, VAT (with certain exceptions).
   • Accrued VAT may qualify as tax-deductible costs in the case of VAT exemption,
   • cost of purchasing goods and services for resale or the provision of services exempt from VAT,
   • inability to deduct VAT (e.g., accommodation services).
3. Remuneration for own work:
   • in the case of partnerships – remuneration paid to a spouse or children for work in the company is not considered as tax-deductible costs,
   • applies to both cash payments and transfers to a bank account.
4. Entrepreneur’s education:
   • expenses on education that do not provide the knowledge necessary for conducting business are not considered tax-deductible costs (e.g., learning foreign languages),
   • only training and courses directly related to the specific activity can be considered tax-deductible costs.
5. Additional examples of non-deductible expenses include:
   • representation costs below a specified threshold,
   • donations,
   • administrative fines,
   • expenses for private purposes,
   • accrued but unpaid taxes.

Non-deductible expenses and tax-deductible costs

The tax-deductible cost is an expense incurred for:

• obtaining income, e.g., purchasing materials for production,
• maintaining or securing the source of income, e.g., renting commercial premises.

The conditions for classifying individual expenses as tax-deductible costs are:

• direct or indirect connection to the business activity, e.g., purchase of office supplies,
• documentation of the expense, e.g., invoice, receipt,
• purpose of the expense – it must be rational and economically justified
• lack of expenses not qualified as costs, e.g. alcohol expenses.

The main differences between non-deductible expenses and tax-deductible costs are:

Can tax deductible costs be challenged?

Expenses incurred for purposes other than those related to business are not tax-deductible. They may be challenged by the tax authorities. The tax office may consider such expenses to be:

• of a superficial nature
• included in the list indicated in the Art. 23(1) of the PIT Act (closed catalogue of expenses not recognized as tax-deductible costs,
• inconsistent with statutory requirements,
• related to income exempt from tax. 

Consequences of challenging tax deductible costs

Challenging the tax-deductible costs results in:

• lack of the possibility to include them as tax-deductible costs,
• an increase in the tax base,
• paying a higher tax.

Exceptions from the catalogue of non-deductible expenses

There are several exceptions to the catalogue of non-deductible expenses. These include, among others:

• Expenses for representation – up to 150% of the daily limit. This corresponds to 200 PLN for taxpayers settling monthly and 500 PLN for taxpayers settling quarterly.
• Interest on loans taken out for purposes related to business activity.

Consequences of incorrectly classifying non-deductible expenses

Incorrect classification as non-deductible expenses may result in:

• Additional value of income tax from the amount of incorrectly classified expenses,
• interest on tax arrears,
• financial penalties.

Non-deductible expenses and fixed assets

The acquisition of fixed assets and intangible assets is subject to different settlement rules compared to standard company expenses. This is due to their specific characteristics, namely:

• long period of use (over 1 year)
• significant initial value (above 10 000 PLN net).

Non-deductible expenses related to the acquisition of fixed assets and intangible assets are characterized by the fact that they:

• concern assets with an expected period of use longer than 1 year and of initial value above 10 000 PLN net.
• the cost is represented by depreciation, i.e., consumption over time.
• depreciation is settled over periods of use.
• depreciation write-offs are made following the rate specified in the regulations.

Non-Deductible Expenses – Summary

Knowing the catalogue of non-deductible expenses is extremely important for every taxpayer. It allows for the correct settlement of income tax. Such knowledge will help you avoid mistakes that can have negative consequences for business. Regulations regarding non-deductible expenses are dynamic. It is worth keeping up to date with changes in this area.

We encourage you to contact our law firm. Our experts are eager to answer your questions related to non-deductible expenses!

FAQ – Questions and Answers about non-deductible expenses