Entrepreneurs’ work at home versus the pandemic and taxes

Due to the state of the pandemic and the introduced restrictions, many entrepreneurs moved the place of the actually performed work from their office or the contractor’s or client’s seat to their homes. The result of the above is usually the necessity to bear higher expenses for the conducted business activities on one’s own. Tax authorities try to react favourably to such a situation that is forced by the circumstances we are experiencing for over a year now, and allow for deducting house expenses, of course provided that during the time of the pandemic a given entrepreneur really bears higher expenses connected with running the business activity at home. The scale of increase of the deduction should naturally be determined individually for each entrepreneur. It can very roughly be estimated that in so far as before the pandemic entrepreneurs working mainly outside their home would recognise a small part of their housing expenses as tax-deductible expenses, such as the rent, electricity, the Internet, of approx. 20%, then at present working from home one can increase such deduction even to 50%.

Last year two tax interpretations were issued that are significant for entrepreneurs working from home. In the first, in connection with the need of constant communication the applicant purchased a TV for the amount for gross PLN 4,599.00. That TV was to be used as a large computer screen for the above mentioned video-conferences and for presenting the content of the screen disclosed by other team members (the so called screen-sharing). In his flat there is no room that is dedicated for the purposes of conducting business activities. The television was hung on a wall in the living room-kitchen in which the entrepreneur performs his official duties. Apart from the time of work, the room is used for private purposes. In connection with the above description, the entrepreneur asked the following question: can the expenses borne in connection with the purchase of the above equipment, i.e. the TV, constitute tax deductible expenses in full if the business activity is conducted in the place of permanent residence and the tax authorities may suspect that the purchased equipment can also be used for private domestic purposes? In the applicant’s opinion, the purchased equipment will increase the effectiveness of work, so it will become the source of generating income. According to the applicant, the above-mentioned TV should constitute the tax deductible expense in full despite the suspicions that it may be used for private domestic purposes.

The Head of the National Fiscal Administration stated that in the light of the legal regulations in force the applicant’s position regarding the assessment of the presented facts is correct and the expenses borne by the applicant for the purchase of a TV fulfil the conditions mentioned in Article 22 section 1 of the Personal Income Tax Act. Therefore, these expenses can be recognised as tax costs which were borne in order to generate income from non-agricultural business activities (case file: 0112-KDIL2-2.4011.657.2020.1.KP).

The above interpretation is therefore clearly favourable for the entrepreneur.

The second interpretation pertains to the situation where an entrepreneur intended to build a house on a real property that was a gift, and the house was to be partly used for conducting business activities (approx. 36.4% of the total living area of the building). Therefore the entrepreneur asked i.a. a question pertaining to the qualification to recognise a cost as a tax deductible expense or to make amortisation write-offs of the expenses created in connection with the purchase of devices, furniture, equipment purchased in order to furnish the surface area of the building occupied both for the purposes of the conducted activities as well as for residential purposes, and used both for the purposes of the conducted activities as well as for residential purposes, proportionately to the surface area of the residential building occupied for conducting business activities.

In the applicant’s opinion, there are no obstacles to recognise the expenses for elements of fittings as tax deductible expenses in the proportion in which such items will be used for conducting business activities. It means that even in the case when the main purpose of a given item is not business activity, but it will be used in an equal degree for personal and business purposes, it will be possible to recognise proportionately the expenses for the purchase of those items as the tax deductible expenses – of course with the assumption that the applicant will be able to indicate the above.

In the interpretation it was stated that the possibility of qualifying a specific expense as a tax deductible expense depends on an objective, reliable and comprehensive assessment of whether in the light of all circumstances of the case, with observing due diligence, the taxpayer, at the moment of bearing the expense, will be able to and should foresee that that expense will cause the generation of income, the preservation or securing of the source of income which in the considered case includes the business activity.  It was emphasized that personal expenses of a person conducting business activities cannot be recognised as tax deductible expenses from non-agricultural business activities. What is important is the cause-and-effect relationship which should explicitly prove that a given expense was borne for the fulfilment of needs resulting from the conducted business activities, and not for the personal needs of the taxpayer or their family. Therefore, the expenses borne for the purchase of such assets may be recognised as tax deductible expenses under the condition that the basic purpose and the manner in which they will be used is their use in the conducted business activities. Any potential use of such items for other (personal) purposes may only be incidental.

In connection with the above, the Head of the National Fiscal Administration stated that the position of the applicant in the part pertaining to recognising the expenses for the purchase of devices, furniture, equipment purchased in order to furnish the surface area of the building used both for the purposes of the conducted business activities as well as for residential purposes is incorrect. However, it was noted in the interpretation that if the elements of such furnishings will be purchased for the purposes of the business activities and will constitute property assets of the company that will only sporadically be used for personal purposes – the expenses connected with their purchase will be borne in connection with generating income from non-agricultural business activities. As a consequence, the applicant will be able to recognise their purchase as tax deductible expenses in the conducted non-agricultural business activities (case file: 0115-KDIT3.4011.213.2020.5.AD).

The above interpretation is therefore unfavourable for the entrepreneur (including the applicant) provided that given household items will be mainly used for personal purposes or even used for personal and business activity purposes in an equal degree. In accordance with the above interpretation, the entrepreneur will not be able in such a situation to make a proportionate recognition of such items as tax deductible expenses. However, such interpretation would be favourable for the entrepreneur if such items were to be purchased for the purposes of business activities and only used sporadically or incidentally for personal purposes. The entrepreneur would be entitled to recognise them as tax deductible expenses in full. A question remains however, how often does “sporadically” or “incidentally” mean in practice, yet in the interpretation that issue was not clarified.