The tax shield in business can bring you many benefits as an entrepreneur. What is its potential? How does it work and how to use it? Find all the answers and necessary information below.
Definition of an enterprise
An enterprise is an organizational unit engaged in economic activity. It is legally, organizationally, territorially, and economically distinguished. It includes human, financial, tangible and intangible resources. An enterprise can engage in commercial, service, or production activities. It has the legal capacity to perform legal acts, and its goal is to generate profits.
| What does an enterprise include? | Name of the enterprise |
| Ownership of real estate or movable property | |
| Rights arising from lease and tenancy agreements for real estate or movable property, as well as rights to use real estate or movable property resulting from other legal relationships | |
| Receivables, securities rights, and cash | |
| Concessions, licenses, and permits | |
| Patents and other industrial property rights | |
| Copyrights and related property rights | |
| Business secrets | |
| Books and documents related to conducting business activities |
What is the tax shield?
It reduces income tax by financing businesses with external capital. This allows to include expenses related to external capital as tax-deductible expenses. It provides a legal and safe way to reduce tax burdens.
| What expenses does it create? | Operating lease installments |
| Leasing fees | |
| interest on loan | |
| amortisation write-offs on tangible assets |
Who can benefit from the tax shield?
The application of this shield depends on the taxation method of the company.
| Who can benefit from it? | Companies settling income tax under general rules (the tax scale or flat-rate tax). |
| Who cannot benefit from it? | Companies settling income tax using a tax card. |
| Companies settling income tax under lump sum on registered income. |
Tax shield and leasing
| Operating Lease | Financial Lease |
| The cost includes the initial fee, and total monthly installments, with the possibility to deduct the added VAT from both the initial fee and monthly leasing installments. | The possibility to deduct interest and depreciate the leased asset. The entire VAT amount must be paid once along with the initial fee. |
When is the tax shield profitable?
It is most commonly used in operating leases. The cost includes then an initial payment and monthly instalments calculated in total. In this case, you can also deduct the VAT added to the initial payment and lease instalment.
How to calculate the tax shield?
The following mathematical formula allows for calculating it:
C= (1-T) x E
where:
C – actual cost including shield
T – income tax rate
E – company expenses
The value of the tax shield can also be calculated using special calculators, e.g. http://finansopolis.pl/investing/tax-shield.
VAT and amortisation in the context of the tax shield
| VAT | The amount of the tax shield depends on the method of VAT deduction from expenses incurred on a vehicle used in the company. |
| Amortisation | The impact on tax liabilities depends on the method and rate of amortisation, as well as the initial value of the fixed asset. The depreciation rate is determined based on the category of the fixed asset. |
If you have more questions about this topic, our experts will help you with comprehensive advice. Feel free to contact our firm.
FAQ – Frequently Asked Questions About the Tax Shield in business
What is the tax shield in business?
It is a system providing tax relief or other benefits to entrepreneurs. Its goal is to increase the net income.
What are the main goals of the tax shield in business?
The main goal is to reduce the tax burden for specific groups of taxpayers. This can lead to increased investment and economic growth in certain economic sectors.
Who can benefit from the tax shield in business?
It is available to entrepreneurs settling income tax on general principles. It also concerns other taxpayers meeting certain criteria, such as income level or type of business.
What benefits can the tax shield bring to entrepreneurs?
It provides tax reliefs, lower tax rates, exemptions, or other forms of support. This leads to increased net profits for entrepreneurs.
Is using the tax shield in business always beneficial?
The benefits depend on the individual tax situation of an entrepreneur. It is worth consulting with a tax advisor to determine if it will be profitable.
Does the tax shield in business have a specific duration?
The duration may vary and is usually specified in the law or regulation introducing this form of tax support.
Is the tax shield in business available to all businesses?
It is available to businesses settling income tax on general principles.
Does using the tax shield in business come with any conditions?
Yes, it usually comes with conditions, which may include e.g. a specified method of conducting business, achieving a certain income level, etc.
How can I get more information about the tax shield in business?
For more information it is advisable to contact local tax offices, or tax advisors or to consult current tax legislation.