Cash PIT from 2025 – conditions and rules of settlement
From January 1, 2025, a new option will become available in the Polish tax system for small business owners—the so-called Cash PIT. The amendment to the Polish Personal Income Tax (PIT) Act allows for tax settlement on a cash basis, which means that taxable income will be recognized upon receipt of actual payment. This new accounting method is intended to support small businesses and improve cash flow, especially for those facing delayed payments from clients. Below, we discuss the rules for using Cash PIT in detail, the revenue limit and the conditions necessary to select this method of tax accounting.
What is Cash PIT?
Cash PIT is a method of accounting in which taxable income is recognized only upon receipt of actual payment for goods sold or services provided. This means that taxpayers can declare taxable income only once their client has settled the payment.
According to the Polish Ministry of Finance, income under this method will be generated not only with full payments but also with partial payments, such as deposits, prepayments, or instalment payments. Similarly, expenses will be deductible only when actually incurred.
The current settlement method is based on the accrual principle, which means that entrepreneurs must recognize revenue as soon as the invoice is issued, even if they have not yet received payment. By eliminating this requirement, Cash PIT aims to avoid situations where business owners are liable for tax on income they have not yet received.
Cash PIT from 2025 – for whom?
Cash PIT will be available to PIT taxpayers engaged in business activities who use one of the following tax schemes under Polish law:
- Progressive tax scale (per Article 27 of the Polish PIT Act)
- IP BOX (per Article 30ca of the Polish PIT Act)
- Flat-rate tax (per Article 30c of the Polish PIT Act)
- Lump-sum tax on registered income
What conditions will apply to entrepreneurs:
- Revenue limit: Cash PIT will be available for entrepreneurs operating independently with prior-year revenue not exceeding PLN 1 million. Initially, the proposed limit was the equivalent of EUR 250,000, but in the final legislation it was raised to PLN 1 million.
- New entrepreneurs: Cash PIT will also be available to newly established businesses. However, they must declare their choice of this method by the 20th day of the month following the commencement of their activity.
- Conditions of Independence: Only sole proprietors can use Cash PIT. Partners in civil or general partnerships are not eligible, although employing staff is permitted.
Cash PIT – accounting rules
Income recognition: In Cash PIT, income is recognized on the day payment is received for an issued invoice. For partial payments (deposits or prepayments), a corresponding partial income is recognized. However, in order to prevent abuse, the law includes a two-year limit: if payment is not settled within two years from the date of invoice issuance, the business owner is required to recognize the income regardless of payment status.
Expense deduction: In this cash-based method, expenses are deductible only after they have been actually paid, which means expenses are aligned with cash flow rather than the date of invoice issuance.
Obligation of documentation: Cash PIT applies only to transactions documented with invoices, which additionally allows for verification of these transactions. Moreover, this method is limited to B2B (business-to-business) transactions, which means that cash revenue is recognized only in contacts with other businesses.
Filing procedure for Cash PIT
To select Cash PIT, business owners must submit a written declaration to the Polish tax office. For ongoing businesses, this declaration must be submitted by February 20 of the given tax year. For newly established businesses, it must be filed by the 20th day of the month following their start of operations. If a business is started in December, the declaration is due by the end of the tax year.
Advantages and disadvantages of Cash PIT
Advantages:
- Improved cash flow: Tax is paid only after receipt of income, eliminating the need to pay tax on uncollected receivables.
- Protection against payment delays: Reduces the risk of tax debt arising from delayed payments by clients.
- Transparency in B2B transactions: Limiting transactions between entrepreneurs increases transparency and helps prevent abuse.
Disadvantages:
- New record-keeping obligations: Entrepreneurs must maintain additional records for invoices accounted for on a cash basis, which adds to the administrative burden.
- Two-year income recognition rule: If the client does not pay within two years, the business owner must recognize the income, which may lead to legal action for unpaid receivables.
- Differences in accounting methods: A business using Cash PIT recognizes income upon payment, while their client may account for expenses on an accrual basis, which potentially may require additional monitoring.
Cash PIT in practice – example
Company A (sole proprietorship) sells goods to Company B, issuing an invoice for PLN 10,000 with a 30-day payment term. Under Cash PIT, income is recognized only when payment is actually received. If Company B delays payment by 90 days, Company A does not yet have to declare this income. However, if payment is still not made two years from the invoice date, Company A will have to recognize the income for tax purposes.
Implementation date for Cash PIT
The new Cash PIT regulations will apply from January 1, 2025. They will cover revenue documented by invoices issued after December 31, 2024, and expenses incurred after this date. Notably, the rules will not apply to income recognized in 2024, such as for invoices issued before the new provisions take effect.
Summary
Cash PIT is an innovative solution, especially for small businesses that struggle with delayed payments from clients. However, before opting for this method, business owners should consider the potential administrative requirements and the need for additional records. Cash PIT offers a valuable tool for optimizing cash flow, but choosing it should align with the specific needs and operations of the business.
Contact us! If you need support in selecting the best tax method for your business or want to learn more about Cash PIT, our team of tax advisors is here to help you adapt the optimal solutions to your needs.
If you have any questions regarding this topic or if you are in need for any additional information – please do not hesitate to contact us:
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