Taxpayers, in order to run a business, need a proper seat – a flat or a larger flat, e.g. the entire building. The purchase of these premises and buildings is usually financed with funds obtained thanks to loans and borrowings. Insofar as capital installments are not recognized as costs in KPiR, interest on the loan for the purchase of real estate may be included in them. However, certain conditions must be met.
In accordance with art. 22 paragraph 1 of the Personal Income Tax Act, tax deductible costs are the costs incurred to achieve or maintain or secure a source of income, except for the costs listed in art. 23 (i.e. e.g. expenditure on the purchase of land, fines and financial penalties imposed in tax penal proceedings, income tax).
On the basis of this provision, it can be assumed that the costs of obtaining revenues are all duly justified expenses connected with achieving revenues. In relation to each expenditure, it is necessary to separately establish a cause and effect relationship related to income, the burden of which lies individually with each taxpayer. What is the interest rate on loans?
Interest on loans
Art. 23 par. 1 point 8a of the PIT Act says that it is not considered as tax deductible expenses expenses on repayment of loans (credits), except for capitalized interest on these loans (credits). Point 32 of the same article also excludes from accrued income accrued but unpaid or forgiven interest on liabilities, including loans.
In accordance with art. 22 and 23, it is considered that the inclusion of interest on the loan as tax costs depends on the existence of a causal relationship between the loan for the purchase of real estate and income from business activities, as well as the fact of paying interest. The causal relationship of the loan with the revenues generated means that the property for which the loan was taken must be used to carry out business activities and the entrepreneur should generate revenues through it.
However, it is important to remember that when classifying interest as a tax cost, Art. 23 section 1 item 33 of the PIT Act. According to this provision, tax deductible costs do not include interest, commissions and exchange rate differences on loans (credits), which increase the investment costs during the implementation of these investments. This means that if the property is under construction (reconstruction or adaptation) and the entrepreneur repays the loan with interest due during the investment, these interest does not constitute a tax deductible cost. The interest increases the value of the property until its construction is completed.
To sum up, in order for interest on a loan for the purchase of real estate to be recognized as tax costs in the current period, the following conditions must be met:
- the loan taken has a cause and effect relationship with the taxpayer’s income from business operations,
- interest has been paid,
- interest does not increase investment costs.
The entries are made in column 13 of the Tax Revenue and Expense Ledger – other expenses.
Interest on private credit
If the entrepreneur uses part of his private apartment for business purposes and has taken out a private loan for its purchase, interest in this respect can also be included in costs. The condition is to determine the appropriate proportion of interest that relates to the business.
The amount of interest subject to cost recognition is calculated in such a proportion as the area of the flat used for business purposes to the total area of the flat. In this case, in order to include interest as tax deductible costs, one should remember about proper documentation regarding the division of the apartment into private and business purposes, loan documentation and about the actual payment of interest.
In addition, when an entrepreneur takes a private loan, which he fully dedicates for business purposes (e.g. purchase of machines, computers), then interest may also be tax deductible. In this situation, it will only be necessary to properly document the purpose of the loan and interest can be considered as tax costs.