Compensation for car repairs is always considered income – the tax authority’s stance hits company vehicles

Is compensation considered income? The issue of including expenses related to car usage as tax-deductible costs and deducting VAT on this account causes entrepreneurs many formalities. Generally, it requires keeping a vehicle mileage log, registering the car with the tax office, and — if the driver wants to deduct a larger part of the expenses — recording it as a fixed asset of the company. Despite fulfilling many obligations, in case of a collision, the entrepreneur’s situation regarding compensation is unfavourable. This is due to the longstanding position of the tax authorities, according to which the amount received as compensation constitutes income in its entirety. Meanwhile, according to the provisions of the PIT Act, tax-deductible costs related to this compensation often reduce only part of the income or may not arise at all.

Compensation for car repairs – tax authority’s position in practice

In an individual interpretation dated 23.09.2019 (ref. no. 0114-KDIP3-2.4011.432.2019.2.A), the Director of the National Tax Information confirmed that even when only part of the repair expenses can be classified as tax-deductible costs (for a car used both for business and private purposes, this is 20% or 75% respectively — if the car is a fixed asset in the company), the entire amount of compensation received constitutes income.
In the case at hand, the taxpayer ran a sole proprietorship. He owned a car used for business purposes and recorded as a fixed asset of the company. In June 2019, the taxpayer was involved in a traffic collision through no fault of his own. The car was damaged. The taxpayer received compensation from the third party’s liability insurance (OC). The car was repaired at his own expense. The taxpayer did not have comprehensive (AC) insurance.

The entrepreneur argued that the compensation amount should not be subject to personal income tax. The tax authority disagreed.

No tax-deductible costs

The Director of the National Tax Information stated that compensation paid by the insurer for damage to assets related to the taxpayer’s business activity constitutes income from business activity as per Article 14(2)(12) of the Personal Income Tax Act. This compensation is related to assets connected with business activity and is not exempt from personal income tax.
This means that in the case described in the individual interpretation, if the taxpayer received compensation of PLN 30,000, the entire amount would be considered income. That is not the end of the bad news, because the taxpayer did not have voluntary comprehensive (AC) insurance. According to Article 23(1)(48) of the PIT Act, expenses incurred due to loss or liquidation of cars and post-accident repairs of cars not covered by voluntary insurance (AC) cannot be included as tax-deductible costs. Therefore, tax must be paid on the full PLN 30,000.

Compensation income exceeds deductible costs

Suppose, however, that the entrepreneur purchased AC insurance. Would the compensation then constitute income? And what about tax-deductible costs? According to Article 23(1)(46a) of the PIT Act, if a car is used for mixed purposes — both business and private — only 75% of repair costs can be recognised as tax-deductible expenses. This means that even with voluntary insurance, deductible costs would amount to PLN 22,500, and the entrepreneur would have to pay tax (and health contributions) on the remaining income.
Only when the car is used exclusively for business purposes and the taxpayer is entitled to deduct 100% of operating expenses from the tax base, do the tax costs “offset” the entire amount of compensation received. Consequently, if an entrepreneur uses the car solely for business and holds voluntary comprehensive insurance, no taxable income arises from compensation received for car repairs.

If you have any doubts about settling tax-deductible costs related to company car use, correct classification of insurance benefits, or need legal advice on other tax matters, please visit our tax law services and contact the ATL Law firm team.