Small Business and Taxes: How to Reduce Tax Costs? Proven Ways to Lower Taxes

Running a small business in Poland requires not only passion and determination but also financial management skills. To run a company effectively, knowledge of current regulatory changes and a proactive approach to tax optimization are essential. The daily challenges of managing operations and navigating complex regulations often make it easy to overlook beneficial solutions that could support the growth of the business.

As a chief accountant with many years of experience, I often notice how entrepreneurs fail to fully take advantage of available reliefs and incentives, missing out on potential savings. It’s understandable that with so many responsibilities, keeping track of all the changes and nuances in regulations can be challenging.

Choosing the Right Form of Taxation

One of the first steps when starting a business is choosing the form of taxation. However, it’s best to do this in collaboration with a tax advisor who can outline the options and help select the most advantageous one. For many entrepreneurs, the importance of this decision only becomes clear after a few months, once the first invoices start coming in.

I still remember working with a client who initially chose general tax rules, even though their business was perfectly suited for a flat tax. After reviewing their situation, we managed to switch the form of taxation, which resulted in annual savings of several thousand złoty. This example highlights the importance of doing your homework before filing documents with your chosen accounting office.

How to Choose the Best Form of Taxation?

Each form of taxation—whether general tax rules, flat tax, or lump-sum tax—has its pros and cons. The choice should depend on several key factors:

• Amount of Revenue

Small businesses with low revenues can benefit from simplified forms of taxation, such as lump-sum tax, where the entrepreneur pays a lower tax on revenue without the option to deduct expenses. Another beneficial solution for this group is the progressive tax scale, mainly due to the possibility of applying the tax-free amount. Revenues up to 30,000 PLN are not taxed, which reduces total tax liabilities (after exceeding the tax-free amount, two tax brackets apply: 12% on income from 30,001 – 120,000 PLN and 32% for income exceeding 120,000 PLN). The tax-free amount and the progressivity of the tax scale allow for tax savings that are not provided by the flat tax.

• Cost of Revenue Generation

If your business incurs significant expenses, it is worth choosing general taxation rules or a flat tax, where you can deduct costs.

• Industry Type

Certain forms of taxation are more beneficial for specific industries. For example, lump-sum taxation may be advantageous for the service sector, where operating costs are relatively low. However, it is important to remember that some activities are excluded from lump-sum taxation, such as pharmacies. Additionally, if providing services to a former employer, the entrepreneur is required to use the tax scale.

Of course, it is always recommended to consult a tax advisor before making a decision. An incorrect choice can lead to unnecessary costs.

Tax Reliefs

Tax reliefs are one of the most underrated tools by small business owners. They are available to varying degrees depending on the form of taxation chosen. For those using general tax rules, reliefs such as joint filing with a spouse can be advantageous, especially if the spouse has low income. Entrepreneurs who choose the tax scale can also benefit from child allowances and the research and development (R&D) tax relief, which can be applied even in industries not directly related to heavy industry.

Example of Applying the R&D Relief

One of our clients ran a technology company and developed software for local businesses. It wasn’t until we discussed their situation that they realized they could benefit from the R&D tax relief, even though their business wasn’t directly related to heavy industry or advanced scientific research. By applying this relief, we were able to reduce their tax liabilities, and the saved funds could be reinvested in the company’s growth.

Another popular relief is the ecological investment relief. Entrepreneurs who invest in photovoltaic panels, energy-efficient equipment, or other environmentally friendly technologies can enjoy additional tax benefits.

Depreciation of Company Assets

Depreciation allows for spreading the costs of purchasing fixed assets over time. In small businesses, it’s often not realized that the purchase of equipment, machinery, or even company cars needs to be depreciated (unless it’s possible to deduct the expense in full, the company benefits from one-time depreciation, or uses de minimis aid), which helps gradually lower income tax.

When is it worth depreciating fixed assets?

For many entrepreneurs, buying new equipment is a significant expense. However, if depreciation is planned well, it can reduce annual tax liabilities. One method is one-time depreciation, which is most cost-effective for fixed assets with lower value. For larger investments, linear depreciation (evenly spreading consumption costs over the asset’s useful life) or declining-balance depreciation (higher depreciation in the early years, decreasing in subsequent years) can be beneficial in the long term.

Fixed assets with a higher value (up to 50,000 EUR – according to the NBP exchange rate as of October 1st of the previous year) for small taxpayers (revenue < 2 million EUR) and those starting a business can also be depreciated in one go, provided the following conditions are met:

• The asset belongs to groups 3-8 of the Classification of Fixed Assets (e.g., machinery, equipment). Buildings and intangible assets are excluded.
• The initial value must exceed 10,000 PLN (lower amounts can be expensed without depreciation).
• Depreciation must be correctly recorded in the books.

Depreciation allows the costs of purchasing fixed assets to be spread out, reducing the tax base and improving cash flow. One-time depreciation is available for small taxpayers and startups under de minimis aid, applicable to assets in groups 3-8 of the Classification of Fixed Assets, with a value of up to 50,000 EUR, excluding buildings and intangible assets. Alternatively, linear or declining-balance depreciation methods can be applied for larger investments, allowing costs to be gradually deducted.

Deductible Expenses

One of the key principles in tax optimization is the smart deduction of business expenses. Many entrepreneurs overlook that not only obvious expenses, like office rent or office supplies, can be counted as costs, but also less obvious ones, such as training, business trips, and even some online tools.

However, it’s important to remember that not every expense can be considered a tax-deductible cost—it must be directly related to the business activity and not be listed in regulations as excluded (e.g., fines and interest, expenses for charity or social activities for employees, lavish meetings, high-value gifts). Therefore, all expenses incurred with the goal of generating income or maintaining a source of income are deductible.

What costs should be considered?

An example is a company we cooperate with—they engage in online sales, and the owner regularly attends industry conferences. After our initial consultation, they realized that conference tickets, travel costs, and accommodation could be deducted from their revenue.

Optimizing Employee Salaries and Benefits

If you employ workers, it’s worth considering salary cost optimization.

How to optimize salaries?

By offering benefits such as sports cards, health insurance, or holiday vouchers. Many companies have shown that after introducing non-wage benefits, they not only attract more job applicants but also optimize taxes.

Operational Leasing – Tax Benefits

For many small businesses, operational leasing is a great tool for tax optimization. It allows for the distribution of equipment or car purchase costs over several years, gradually lowering taxes. Operational leasing also offers flexibility in adjusting installment amounts to the seasonality of income. This means that seasonally operating companies, like those in tourism or agriculture, can negotiate seasonal rates—higher during peak periods and lower during months with lower income. This helps better manage cash flow and minimizes the risk of budget overload.

Operational vs. Financial Leasing – What to Choose?

In operational leasing, lease installments, although not always fully deductible (especially for passenger cars – Polish tax regulations impose a limit on deducting leasing costs for cars over a certain value), are considered business expenses, which reduces the taxable base. This is especially beneficial for businesses that frequently replace or upgrade assets like vehicle fleets or machinery. After the lease term ends, the lessee can purchase the item, though this is not mandatory, providing greater flexibility.

In financial leasing, the leased item is immediately considered the lessee’s property, who then depreciates it, increasing the company’s expenses. The interest part of the lease installment is also a deductible expense, while the principal part is not, as it represents the repayment of the asset’s initial value.

After all lease installments are paid, the item becomes the lessee’s property without any additional purchase requirement, as financial leasing typically includes a transfer of ownership at the end of the payment term.

VAT Registration – When Is It Worthwhile?

Not every entrepreneur realizes that registering for VAT may bring benefits, especially if the company mainly cooperates with other businesses. VAT deduction on purchases is one of the key tax optimization tools.

What are the benefits of VAT registration?

If you regularly incur costs related to the purchase of goods or services, VAT registration allows you to recover the tax, which effectively reduces business expenses.

For service companies, like beauty salons, VAT registration can be especially beneficial: cosmetic services are taxed at a lower rate of 8%, while materials such as cosmetics or equipment are purchased with VAT at the 23% rate. As a result, the company can recover part of this tax, lowering its costs. Similarly, hair salons can optimize costs by being active VAT payers, especially when purchasing products and materials for services.

However, it’s worth noting that VAT registration is not always advantageous, especially for companies providing services to individual consumers, where VAT may increase prices.

Tax Benefits of Paying ZUS Contributions

Paying ZUS (Social Insurance Institution) contributions can bring tax benefits, as most of them can be counted as business expenses, which lowers the taxable base. In practice, this means that entrepreneurs who regularly pay contributions reduce their tax liabilities, which positively impacts their financial situation.

Contributions that can be counted as business expenses include:

• Pension, disability, and accident insurance – these reduce the income from which tax is calculated.
• Sickness insurance – also deductible, though voluntary for entrepreneurs.
• Labor Fund contribution – supports the unemployment benefits system and is also deductible from income.

However, the health insurance contribution is an exception. As of 2022, its deduction rules have changed, and now only part of the health insurance contribution (to a limited extent, depending on the tax form) can be deducted from income. Therefore, health insurance represents an additional expense that cannot be fully deducted.

By selecting the appropriate tax form, using tax reliefs, depreciation, and optimizing costs and salaries, you can effectively reduce tax burdens. This is especially important for small and medium-sized business owners who don’t have their own accounting department—it’s worth consulting with an accountant or tax advisor.

For larger companies, collaborating with an Accounting Outsourcing Center may be beneficial, as professionals will handle the company’s needs comprehensively, tailoring actions to individual requirements. Such collaboration can be the most cost-effective solution, ensuring the highest level of service by experienced experts, without the need to hire an entire accounting department.

The article was co-authored by Julia Reczyńska | Accounting Expert for SMEs at Cafe Finance Group.