An expenditure that does not constitute a business expense.

The difference between expenditure and cost – implications for business owners

The correct classification of expenditure and costs forms the basis for tax returns and financial management within a business. Although in everyday language these terms are often used interchangeably, their meaning in accounting and taxation is fundamentally different. Understanding this difference has a direct impact on the amount of tax paid, the reliability of financial statements and the business owner’s security during a tax audit.

In business practice, not every expense incurred by a company can be classified as a tax-deductible cost. The legislator sets out both general conditions and specific exclusions which determine whether a given expense will reduce the tax base. This article outlines the complexity of the issue in the context of the latest regulations and the practice of the tax authorities.

What is an expenditure, and what is a cost?

An outlay is any amount spent by an entrepreneur on the purchase of goods, services or other assets. It may relate to business purposes as well as personal or investment matters. An expense includes both office rent and the purchase of coffee for one’s private home, provided the funds come from a business account.

Cost – strictly defined tax and accounting criteria

A cost, as defined by tax legislation (Section 22(1) of the PIT Act and Section 15(1) of the CIT Act), is an expenditure incurred for the purpose of generating revenue, maintaining or securing a source of revenue, with the exception of expenditure excluded by law. A cost is therefore an expenditure that meets specific conditions, has a direct or indirect connection with business activities, and is duly documented.

In balance sheet terms, in accordance with Article 3(1)(31) of the Accounting Act, costs and losses are substantiated decreases in economic benefits, which manifest themselves through a reduction in the value of assets or an increase in liabilities and provisions, leading to a reduction in equity.

When does an expenditure not constitute a tax-deductible expense?

For an expenditure to be classified as a tax-deductible expense, it must satisfy all of the following conditions simultaneously:

• it was incurred for the purpose of generating, maintaining or securing revenue,
• it must relate to the business activity carried out,
• it has not been reimbursed to the business owner in any form (e.g. grant, subsidy),
• it is not included in the exhaustive list of expenses excluded from tax deductible costs (Section 23 of the PIT Act, Section 16 of the CIT Act),
• is properly documented (usually by an invoice or other accounting document).

Failure to meet even one of these conditions means that the expenditure cannot be treated as a tax-deductible cost, even if it is reasonable and incurred in the course of business.

Expenses that do not qualify as tax-deductible costs – the most common cases

The regulations provide for an exhaustive list of expenses that cannot be recognised as tax-deductible costs under any circumstances. Below are the most common examples:

1. Personal expenses: Purchases relating to the entrepreneur’s healthcare (e.g. glasses, doctor’s appointments, gym membership), life insurance, and courses unrelated to the business – even if they are partly business-related, they do not constitute a tax-deductible expense.
2. Income tax, inheritance tax and gift tax: Income tax, inheritance tax, gift tax and VAT (with exceptions) cannot be treated as business expenses.
3. Penalties, fines and compensation: Fines, administrative penalties, contractual penalties for defects in goods or services supplied, delays in delivery, and interest on tax arrears – none of these items reduce the tax base.
4. Repayment of loans and credits: Principal instalments on loans and credits being repaid are not deductible, whilst interest may be deductible once it has actually been paid.
5. Remuneration for one’s own work and that of relatives: A sole trader cannot treat the value of their own work, or that of their spouse or minor children, as a business expense.
6. Donations and entertainment expenses: Expenditure on donations and certain entertainment costs (particularly catering services, alcohol and expensive gifts) – even if they are related to building the company’s image.
7. Lack of proper documentation: An expense without an invoice, receipt or other valid accounting documents cannot be recognised as a deductible expense.

In day-to-day operations, there are expenses which, at first glance, may seem like obvious costs, but upon closer examination turn out to be excluded from tax-deductible expenses.

• Purchase of a fixed asset: The purchase of a machine for 100,000 zł – the expenditure itself is not a tax-deductible cost at the time of purchase. Only the depreciation write-offs, spread proportionally over the years of use, will constitute a cost (e.g. 1/5 of the value per year over a 5-year depreciation period).
• Fuel for a vehicle used for both business and private purposes: Refuelling for PLN 500, with the car used 75 per cent for business purposes. Only PLN 375 may be claimed as a business expense; the remainder is a private expense, excluded from deductible costs.
• VAT: Purchase of goods subject to VAT which the business owner cannot deduct (e.g. catering services, accommodation) – non-deductible input VAT may be treated as a business expense, but only to the extent that the taxpayer is deprived of the right to deduct it, and not when they voluntarily waive that right.
• Gym membership: An expenditure on a gym membership for a business owner is a personal expense and does not constitute a business expense, whereas the same expenditure for an employee may be regarded as an employee benefit and therefore a tax-deductible expense.
• Courses and training: A general development course (e.g. learning a foreign language unrelated to business activities) does not constitute a business expense. However, training closely related to business activities (e.g. a specialist course for an IT programmer operating in that field) may be a business expense.

Expenditure that does not constitute a tax-deductible expense – statutory catalogue (NKUP)

Key items in the catalogue of expenses not constituting tax-deductible costs (NKUP)

• Deductible income tax and VAT
• Instalments on loans and credits (excluding interest paid)
• Fines, financial penalties, and compensation for breaches of the law
• Donations and contributions to non-mandatory organisations
• An entrepreneur’s personal expenses (health, beauty, leisure, general education)
• Own work (and that of relatives) in a sole trader business
• Selected entertainment expenses (alcohol, lavish gifts, grand events)
• Undocumented expenses, lack of an invoice or receipt
• Losses arising from abandoned investments, time-barred claims

The full list is set out in Section 23 of the PIT Act and Section 16 of the CIT Act. This is an exhaustive list – if an expense is listed there, it cannot be treated as a tax-deductible cost, regardless of the circumstances or arguments put forward.

Specific features of selected expenses that do not constitute costs – interpretative nuances

The purchase of a fixed asset does not constitute a cost in its entirety at the time of acquisition. Only depreciation write-offs in accordance with the prescribed useful life constitute a cost. For passenger cars, value limits have been introduced; above these limits, the excess depreciation does not constitute a cost (PLN 150,000 for petrol and diesel cars, PLN 225,000 for electric cars).

Expenditure on improvements to a fixed asset increases its initial value and is also recognised as a cost through depreciation.

Expenditure on company cars

Expenditure on the running costs of passenger cars used for both business and private purposes is subject to a restriction – only 75 per cent of the costs incurred may be treated as tax-deductible expenses, and non-deductible VAT is also limited to this proportion.

Lease payments, comprehensive insurance premiums and depreciation write-offs on vehicles exceeding the specified value limits do not constitute a tax-deductible expense in the amount exceeding those limits.

Taxes and charges

Taxes related to business activities, such as property tax, vehicle tax or civil law transaction tax (PCC), may constitute tax-deductible costs – but only where they are related to revenue. Income tax, inheritance and gift tax, and deductible VAT are not costs.

Expenditure on penalties, fines and compensation

The vast majority of penalties and fines, whether administrative or contractual, arising from a failure to exercise due care or a breach of the law, are not tax-deductible. Exceptions apply to contractual penalties arising from circumstances beyond the taxpayer’s control, but these require detailed analysis and documentation on a case-by-case basis.

Documenting expenses – an essential condition for tax deduction

A lack of proper documentation prevents an expense from being recognised as a tax-deductible cost. The most commonly accepted form of evidence is a VAT invoice. In some cases, contracts, bank transfers or other documents are permitted, provided they clearly confirm the link between the expense and business activity.

For example, the purchase of a second-hand printer from a private individual not engaged in business activity – a sale and purchase agreement and confirmation of the bank transfer may serve as the basis for recognising the expenditure as a tax-deductible cost.

Incorrectly classifying an expense as a tax-deductible cost results in the need to amend tax returns, risks financial penalties and, in extreme cases, allegations of tax fraud. An accountant’s role is not only to classify expenses correctly, but also to keep abreast of changes in the regulations and to consult the tax authorities on any uncertainties.

In ambiguous situations, it is advisable to apply for an individual tax ruling or seek advice from specialist firms.

How can you safely manage non-deductible expenses?

The ability to correctly distinguish between expenses and tax-deductible costs not only allows for the optimisation of tax liabilities but, above all, protects the business owner from the risk of disputes with the tax authorities. In a climate of frequent regulatory changes and rising expectations from the tax authorities, investing in knowledge, professional advice and modern accounting tools is key to running a business efficiently and safely.

An expense that is not a tax-deductible cost is not merely an abstract legal concept, but a practical issue faced every day by thousands of Polish companies. A proactive approach to this matter should become standard practice in every modern organisation.