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Own business - how to enter the market and minimize costs at the same time?

Agnieszka KURKOWSKA
Accounting Manager at RSM Poland

Peter is a young physiotherapist. We have known each other for years. Listening to his business ideas, I have always envied his devotion to new projects and challenges. So when he asked me two years ago what he should do to enter the market and minimize costs at the same time, I started investigating the subject in question. And I will gladly share the conclusions of my investigation with you.

Establishing your own business incurs many expenses. A new entrepreneur entering the market, such as Peter, will not be able to cover all of them at once. We pondered about using Peter’s personal assets for business purposes. We immediately thought of transferring a car the physiotherapist could use to commute to his patients to the new company.

Let us consider what such an action should look like from the formal point of view and what the consequences for Peter would be.

Transferring personal assets for the purpose of conducting business activity

Fact: The car was bought by my friend over a year ago for private use, no VAT was deducted. Peter has an invoice for the purchase and is the sole owner of the vehicle. Peter is an active VAT taxpayer. Moreover, he is liable for personal income tax. Peter intends to use the car for business purposes only and will, therefore, enter it into the company's assets as a fixed asset.

By way of a reminder, in light of the Polish Accounting Act, a fixed asset is that component of private assets which is owned or co-owned by a taxpayer, is complete and usable, has an estimated service life of more than one year and is used exclusively for business purposes.

By fulfilling the aforementioned conditions, Peter was later eligible to claim the expenses related to the use of the transferred car as an operating expense.

Documentation

In conformity with the established practice, Peter made the transfer of the car for business purposes by way of a declaration.

The declaration was made in writing. In addition to the date and place of the signing, the entrepreneur's data and the declaration of the property’s ownership, Peter determined which component of his personal assets, at what value and as of what day would be transferred for business purposes.

As the date and the entrepreneur’s data do not usually raise any doubts, the way of establishing the initial value of the transferred assets may pose some questions.

The initial value is usually the purchase price of the fixed asset, which is easiest documented by an invoice, bill or a similar sales document. Peter chose this option.

If a taxpayer does not have a document for the purchase of a fixed asset, they shall carry out their own valuation, taking the market price of other fixed assets of the same kind applicable in the month of December of the year preceding the year of its entry into the inventory of fixed assets and determine its current state and the degree of wear into account.

If an owner has himself manufactured a fixed asset, its initial value shall be the cost of its production, including the purchase price of tangible assets used in the process, any outsourced services used, labor costs and other costs.

If a taxpayer is unable to determine the cost of production, the initial value shall be determined by an assessor appointed by the taxpayer, taking the market prices applicable in the month of December of the preceding year into account.

However, if a tangible asset was received by means of a gift or inheritance, the initial value shall be determined as the market value of the asset applicable as at the date of its purchase or the amount specified in the free of charge transfer agreement, if it is lower than the market value.

Determining the initial value of a fixed asset is an important part of the declaration, since it will be depreciated from that value.

PIT (Personal Income Tax)

The depreciation of fixed assets transferred into a company from private assets is no different from the depreciation of fixed assets acquired directly for the needs of the company.

In conclusion, Peter entered the market providing mobile physiotherapy services using a car, an indispensable working tool he had initially purchased for private use, by transferring it from his private assets for business purposes by way of a declaration.

Two years after transferring his private asset for business purposes, Peter showed up at my doorstep again with a new idea - plans to get rid of the car.

Removing an asset from a business

A person conducting a business activity can choose from several options in order to remove an asset from their business. The first option that comes to mind, no doubt, is sale. The business owner can also opt for the withdrawal of an asset for own purposes or gifting it.

The choice of one of the aforementioned options depends solely on the business owner’s decision. It should, however, be deliberate, as each of the options listed above gives rise to particular tax effects.

Let us consider, based on the choice made, what effect disposing of the car from the company's assets will have on personal income tax. Will it be subject to value added tax, and if so, when?

Sale

PIT (Personal Income Tax)

An entrepreneur who is subject to personal income tax and who plans to dispose of a fixed asset used for business purposes may naturally sell that asset. By selling a company’s assets, the entrepreneur should be aware of the fact that the appropriations therefrom will constitute the revenue of the company. Accordingly, the amount for which the company car is to be sold will be taxed at the rate of tax appropriate to the form that is applicable to a particular business model.

It is worth noting that tax is paid on income and if the car has not yet been fully depreciated, then the costs should be attributed to the revenue, which in the case in question will be the not-yet-depreciated value of the car. If the sold car is fully depreciated, no amounts shall be included into the tax-deductible revenues. For these amounts have already been accounted for as tax-deductible during the period of depreciation.

VAT (Value Added Tax)

When considering the subject with the value added tax in mind, the issue seems to be quite simple. The sale of cars used for taxable activities is subject to VAT, regardless of whether a taxpayer was entitled to deduct VAT on its purchase or not.

Tax exemptions only apply to the supply of products used exclusively for the purpose of tax-exempt activity, provided that the contractor undertaking the supply operation was not entitled to reduce the tax amount due by an amount of the tax charged for the purchase, import or production of these products.

Documentation

Upon selling a fixed asset, a taxpayer is obliged to issue an invoice. The invoice should include the date when it was issued, document number, name of the taxpayer and the purchaser, their respective addresses and NIPs (tax identification numbers), date of delivery, names, quantity and number of products, net price, applicable tax rate and the total amount due.

Withdrawal from business use - transfer for private use

PIT (Personal Income Tax)

Withdrawing a car from business and transferring it for private use will not be a source of revenue in itself. The situation changes when a taxpayer decides to sell a car which was previously withdrawn from business use, since this action will generate revenue from business activity. Importantly, revenue will arise even if the business has already been formally wound up.

In order for the revenue derived from the sale of a car which was withdrawn from business use to be exempt from taxation, at least 6 years must lapse from the first month following the month in which the car was withdrawn from the business.

VAT (Value Added Tax)

Transferring a car for private use shall not be subject to value added tax if a taxpayer was not entitled to deduct value added tax upon the purchase of the car.

A subsequent sale of the car from private assets shall not be subject to value added tax. This is due to the fact that an occasional, one-off sale of a car from private assets is not considered as an economic activity and the seller is not deemed to be a taxable person in this transaction.

Transferring a car for private use shall be subject to value added tax if a taxpayer was entitled to deduct value added tax upon the purchase of the car.

A subsequent sale of the car from private assets, as has been seen above, shall not be subject to value added tax.

Documentation

Any transfer of corporate assets for private use shall be properly documented. With this end in view, a fixed asset transfer protocol, including the date of issue, company data, date of transfer of the fixed asset for private use, description of the fixed asset enabling its identification should be drawn up and signed by the business owner.

The transferred fixed asset shall be removed from the fixed assets register.

A deed of gift

PIT (Personal Income Tax)

Gifting a corporate asset to a member of the closest family qualifying for the, so called, nil-tax group (e.g. son, daughter, spouse, parents, siblings) does not give raise to personal income tax obligation. The family member will be able to sell the car without paying any tax just 6 months after receiving it.

In the event that the car being gifted is a company asset, the last depreciation charge shall be made by the taxpayer for the month in which the gift was made.

The non-depreciated value of the fixed asset shall not be included in tax deductible revenues. This follows from a general definition of a cost which states that the cost must be incurred in relation to a generated revenue. No revenue in the case of a gift means, ipso facto, no cost. 

The taxpayer shall not be obliged to adjust any depreciation write-offs effected up to the moment the asset is transferred and excluded from tax costs.

VAT (Value Added Tax)

If a taxpayer gifts a passenger car, then if he was entitled to deduct value added tax on its purchase, he shall be obliged to charge VAT as if it were a sale.

However, no VAT shall be charged on a car which is transferred free of charge provided that the taxpayer who initially purchased it was not entitled to deduct VAT upon purchase.

Documentation

If a deed of gift is to be executed at once, an oral agreement shall suffice. However, for evidence purposes and in case of a tax inspection, it is better to draw up the deed in a written form.

The deed, other than stating the place and date, as well as the names of the parties thereto, should also include the benefactor’s declaration defining the gift and stating that they are free to dispose of the object of the gift freely and that it is free of any defects.

The deed of gift should include both the statement of the benefactor about the willingness to gift a specific item or an amount of money, and the statement of the beneficiary to the effect that they accept the gift.

I wonder what decision Peter will make.