Accounting Supervisor at RSM Poland
What is more beneficial from the perspective of tax deductible costs: car rental or an operating lease? What is the significance of various forms of agreements for an entrepreneur – taxpayer?
It turns out that various tax approaches to costs of using a company car indeed depend on the kind of agreement submitted, that is if we deal with a car rental agreement or an operating lease agreement, matching the definition of leasing according to the Corporate Income Tax Act.
According to Art. 16 par. 1 item 51 of the Corporate Income Tax Act (henceforth: CIT Act) and Art. 23 par. 1 item 46 of Personal Income Tax Act (henceforth: PIT Act), the costs of using a company car which is not a component of a taxpayer’s asset, in the part exceeding the value derived from multiplying the number of kilometers of actual mileage of a vehicle and the rate for 1 km mileage (0.5214 or 0.8358 for 1 km depending on the engine capacity) are not included in tax deductible costs. Practically, it means that the costs of using a car by the terms of a rental agreement should be calculated in accordance with the car operating cost per kilometer. Therefore, it is essential to keep a mileage logbook, collect all invoices and keep the cost accounts, as much as to make sure if only the part of expenses which does not exceed the mileage allowance limit is included in monthly costs
All operating costs of using a company car (e.g., fuel, oil, service, maintenance etc.) are subject to restrictions due to the calculation of the mileage allowance. Only the company car rental fee can be calculated regardless of the abovementioned restrictions. Although various tax authorities used to claim that car rental costs should be included in the so called “limited costs”, the controversy is now finally resolved by the Minister of Finance in a form of a regulation (the Minister of Finance Regulation of 8 November 2013, file ref. no. DD2/033/55/MWJ/13/RD-111005) stating that „Costs due to the use of a car are costs of operating this very car. These costs do not include the cost of obtaining the right to use a car. It means that all operating costs are included in the costs of using a car rented for business purpose. Costs of renting a car for business purpose are not operating costs. These are the costs of obtaining the legal right to use a car, therefore, they constitute a separate category not included in the operating costs of using a car”.
Leasing without restrictions
If, however, a company car is used according to an operating lease agreement, although it is still a vehicle which is not included in the fixed assets of a taxpayer, it is unnecessary to keep a mileage logbook and all costs concerning the vehicle can be included directly in the amount of tax deductible costs of an entrepreneur (Art. 16 par. 3b of CIT Act and Art. 23 par. 3b of PIT Act)
So when a submitted contract can be qualified as an operating lease agreement? In order to find the answer, we should refer to Art. 17a of CIT Act (Art. 23a item 1 of PIT Act). We would consider it a leasing agreement if:
- It is a fixed-term agreement, constituting at least 40% of the standard depreciation period, which, in the case of cars, means that the minimum duration of the agreement must be 2 years (standard depreciation period – 5 years);
- The total amount of charges determined in the lease agreement (excluding VAT) must equal at least the initial value of a car (in the case of a new one) or the market value determined for the day of submitting next contract (in the case of a previously leased vehicle). In the total amount of charges we include, for example, the initial fee, rental fees, and the so-called zero rental fee for the entire duration of the contract, as much as the charge for car buyout.
It is worth noting that it is not the name but the content of a submitted contract which is, from the perspective of tax deductible costs, of a key meaning. It may happen that a document entitled “car rental agreement” meets all the above mentioned criteria of an operating lease agreement. In such case, however, the operating costs of using a company car are not due to any restrictions as far as the entrepreneur’s tax deductible costs are concerned.