If you run a business and struggle with late payments from clients, remember that in the case of outstanding receivables, you can benefit from bad debt relief – a tool that allows you to reduce your taxable income and income tax. 

What is bad debt relief?

Bad debt relief is a mechanism that allows entrepreneurs to reduce their taxable income by the value of unpaid receivables. This relief can be applied when an invoice remains unpaid for 90 days after the due date specified on the document or in the contract. 

What are the conditions for bad debt relief? 

To benefit from bad debt relief, certain conditions must be met: 

• the receivable has not been settled or sold for at least 90 days,
• it concerns a commercial transaction with a due date after December 31, 2019 
• on the day prior to applying the relief, the debtor cannot be in liquidation, bankruptcy, or restructuring, 
• no more than 2 years have passed since the end of the year the invoice was issued, 
• both parties (creditor and debtor) must be taxable entities operating in Poland. 

Bad debt relief does not apply to transactions between related parties. 

Responsibilities of the creditor and debtor

The creditor has the right to:

• reduce taxable income or increase a loss in the annual tax return,
• decrease income when calculating an income tax return,
• apply the relief without notifying the debtor,
• Use the relief in income tax regardless of whether it was used for VAT purposes

The debtor is obligated to:

• increase taxable income by the value of the unpaid liability (if it remains unpaid by the advance payment due date),
• adjust the income base starting from the period in which 90 days have passed since the payment due date,
• settle the unpaid liability in tax records, even if the creditor has not applied for the relief.

How to benefit from bad debt relief?

Bad debt relief can be used starting from the period in which 90 days have passed after the payment due date. The creditor reduces their income (or revenue, in the case of flat-rate tax) by the amount of the unpaid receivable. If the payment is received later, the income should be appropriately increased. 

If you are unsure how to properly apply for bad debt relief, seek professional accounting support to ensure compliance. 

If you need additional support in accounting and hr &payroll services contact us!

Text based on: https://poradnikprzedsiebiorcy.pl/-ulga-na-zle-dlugi-nowe-zasady