More and more business owners finance their vehicles through operating lease agreements. This form of financing offers many benefits, but it also brings certain accounting challenges, especially in emergencies. One of the most common problems business owners face is having to use a replacement car while their leased vehicle is being repaired after an accident or road collision.
Using a replacement car generates additional costs, which can be settled in different ways depending on the nature of the expenses and how the vehicle is used. Settling these costs correctly is crucial for getting the company’s tax burden right and for complying with current tax law.
The costs of using a replacement car can be tax-deductible costs, provided they are incurred to generate revenue or to preserve a source of revenue. How they are settled depends on the type of expense and how the vehicle is used in the business
Legal basis for settling replacement car costs
Settling the costs of using a replacement car is based on the Polish PIT Act (personal income tax) and the VAT Act. Under Article 22(1) of the PIT Act, tax-deductible costs are costs incurred to generate revenue or to preserve or secure a source of revenue, except for the costs listed in Article 23.
What matters most is that the costs of using a replacement car are not included in the list of non-deductible costs in Article 23 of the PIT Act. This means that, as a rule, they can be tax-deductible costs, but their settlement is subject to certain restrictions and percentage limits.
All expenses related to a replacement car should be properly documented, as a rule with invoices or bills showing the business owner’s company details. Without proper documentation, it is difficult to show that an expense is a tax-deductible cost
How the costs of a replacement car are settled depends primarily on the nature of the expenses. There are two main categories of costs:
- Running costs related to the day-to-day use of the vehicle
- Fees for hiring the replacement car
Each of these categories is subject to different tax settlement rules.
Running costs of a replacement car
Running costs are the most common category of costs related to using a replacement car. This group includes:
- Fuel
- Consumables
- Parking fees
- Motorway tolls
- Minor repairs and maintenance
How these expenses are settled depends on how the vehicle is used in the business.
| How the vehicle is used | Cost deduction limit | VAT deduction |
|---|---|---|
| Mixed (business + private) | 75% of tax-deductible costs | 50% VAT |
| Exclusively for business (not notified) | 75% of tax-deductible costs | 50% VAT |
| Exclusively for business (notified) | 100% of tax-deductible costs | 100% VAT |
For a passenger car used in a mixed way, i.e. both privately and in the business, running costs are settled up to a limit of 75% as tax-deductible costs. This means the business owner can treat only three quarters of the running costs incurred as tax-deductible costs.
Passenger cars used exclusively for business can be settled at 100% as tax-deductible costs. However, this requires notifying the tax office (urząd skarbowy) and keeping proper records of how the vehicle is used
Procedure for settling running costs at 100%
To settle running costs at 100%, the business owner must take the following steps:
- File the VAT-26 form (notification of a vehicle used exclusively for business) by the 25th of the month following the month in which the first expense was incurred
- Set rules for using the vehicle that rule out private use (most often in the form of vehicle use rules)
- Keep a detailed vehicle mileage log (kilometrówka)
- Document every use of the vehicle
- Keep all documentation until the tax liability becomes time-barred (as a rule, 5 years from the end of the year in which the tax payment deadline passed)
Practical example of settling running costs
Consider a business owner registered as a VAT payer who received an invoice for fuel for a replacement passenger car used in a mixed way. The invoice was for PLN 100 net, PLN 23 VAT and PLN 123 gross.
After a road collision, a business owner running a consultancy received a replacement car for 2 weeks. The vehicle was used both for client meetings and for private purposes. He paid PLN 500 gross for fuel (PLN 406.50 net + PLN 93.50 VAT). He could treat as tax-deductible costs: PLN 406.50 + PLN 46.75 (50% VAT) = PLN 453.25 × 75% = PLN 339.94.
Calculating the cost:
- The first step is to determine the amount of deductible VAT
- For a car used in a mixed way, 50% of VAT is deductible
- The deductible VAT is: 50% of PLN 23 = PLN 11.50
- Cost before applying the limit: PLN 100 (net) + PLN 11.50 (50% VAT) = PLN 111.50
- Applying the 75% limit: PLN 111.50 × 75% = PLN 83.63
The final amount of PLN 83.63 will be recorded as a tax-deductible cost. The rest of the expense cannot be treated as a tax-deductible cost because of the applicable restrictions
Fees for hiring a replacement car
Fees for hiring a replacement car are subject to different rules than running costs. Under Article 23(1)(47a) of the PIT Act, when a vehicle is hired, taxpayers can treat the fees for hiring a passenger car as costs in the proportion that the limit bears to the value of the car. From 1 January 2026, the limit is PLN 150,000 for a combustion-engine car with CO2 emissions below 50 g/km, PLN 100,000 for emissions of 50 g/km or more (Article 23(1)(4)(b) and (c)) and PLN 225,000 for an electric or hydrogen-powered car (Article 23(5e)). How to determine that value under a lease is shown in our article on car value and the cost limit.
How the limit is calculated is crucial. For long-term hire agreements, the limit is based on the value of the vehicle stated in the hire agreement. The situation is different for short-term hire, i.e. hire lasting less than 6 months.
For short-term hire, under Article 23(5d) of the PIT Act, the value of the vehicle is based on the value stated for insurance purposes. This value is the basis for calculating the proportional cost limit
An important feature of settling hire fees is that the limit under Article 23(1)(47a) applies regardless of how the vehicle is used. This means that whether the replacement car is used exclusively for business or in a mixed way, the hire fees are subject to the same amount limit.
Example of settling short-term hire fees
A business owner who is not a VAT payer uses a replacement passenger car under a short-term hire exclusively for business. The value of the vehicle on the insurance policy is PLN 180,000, and the monthly hire fee is PLN 2,000 gross. It is a combustion-engine car with CO2 emissions below 50 g/km, so the limit is PLN 150,000.
Calculating the proportional limit:
- Ratio of the limit to the value of the vehicle: PLN 150,000 ÷ PLN 180,000 = 0.8333 (83.33%)
- Applying the ratio to the hire fee: PLN 2,000 × 150,000 / 180,000 = PLN 1,666.67
The amount of PLN 1,666.67 will be recorded as a tax-deductible cost in the KPiR (tax revenue and expense ledger). The rest of the hire fee cannot be treated as a cost because it exceeds the amount limit. With CO2 emissions of 50 g/km or more (limit PLN 100,000), the cost would be PLN 1,111.11
VAT on replacement car costs
VAT on expenses for a replacement car is settled on exactly the same principles as for vehicles owned by the business owner. The basic rule is that 50% of VAT on expenses for passenger cars documented with VAT invoices is deductible.
Under Article 86a(1) of the VAT Act, the business owner can deduct 50% of the VAT on costs related to a replacement passenger car. The non-deductible VAT (the remaining 50%) can at the same time be a tax-deductible cost, which is taken into account when calculating tax-deductible costs.
The business owner can deduct 100% of the VAT on replacement car costs, but this requires meeting additional formal and documentation obligations set out in the regulations
Conditions for deducting 100% of VAT
To deduct 100% of VAT, the business owner must meet the following conditions:
- File the VAT-26 form by the 25th of the month following the month in which the first expense was incurred, and no later than the day the JPK_V7 file (VAT return with records, SAF-T file) for that period is submitted
- Keep a detailed vehicle mileage log (kilometrówka)
- Set rules for using the vehicle that rule out private use (most often in the form of vehicle use rules)
Note that if the VAT-26 form is not filed on time, for VAT purposes the vehicle is treated as used exclusively for business only from the first day of the month in which the taxpayer files it. For income tax, if the taxpayer does not keep a vehicle mileage log, the car is treated as also used for private purposes. The car's VAT and PIT status also has to be taken into account when selling a company car.
Documentation required for VAT settlement
Settling VAT on replacement car costs correctly requires proper documentation:
- Fuel invoices must show the business owner’s company details
- Parking bills should be issued to the company
- Documents for motorway tolls must allow the taxpayer to be identified
- Invoices for hiring the replacement vehicle require the full details of the counterparty
All accounting documents related to a replacement car must be kept until the tax liability becomes time-barred, i.e. as a rule 5 years from the end of the calendar year in which the tax payment deadline passed. This applies both to VAT invoices and to documents confirming the vehicle’s mileage
How insurance compensation affects the settlement of costs
Settling the costs of using a replacement car can become even more complicated when these expenses are financed from insurance compensation. How both the costs and the compensation are settled depends on the insurance cover of the vehicle involved in the accident.
| Type of insurance | Settlement of compensation | Settlement of replacement car costs |
|---|---|---|
| OC only | Revenue = surplus over costs | Not included in tax-deductible costs |
| OC + AC | Full amount as revenue | Can be treated as tax-deductible costs |
| AC | Full amount as revenue | Can be treated as tax-deductible costs |
For vehicles covered only by OC insurance (compulsory third-party liability insurance), taxable revenue is only the surplus of the compensation received over the expenses incurred. Invoices for repairing the vehicle and the costs of the replacement car are not included in tax-deductible costs, but the input VAT on them is deductible.
When the damaged car is covered by OC and AC insurance (AC: voluntary own-damage cover), the compensation received is taxable revenue, and the invoices documenting the costs of using the replacement car can be treated as tax-deductible costs under the rules described above
Practical aspects of settlement with compensation
Consider a business owner registered as a VAT payer who received a replacement car after a road collision. The vehicle is used in a mixed way and is covered by OC and AC insurance. The business owner received:
- An invoice for repairing the vehicle
- An invoice for the costs of using the replacement car
- Compensation from the insurer
The settlement should be made as follows:
- Invoice for repairing the vehicle – settled as costs with the 75% limit and 50% VAT deduction
- Replacement car costs – settled under the rules for running costs or hire
- Compensation received – reported in full as taxable revenue
After a road collision, a transport company received a replacement car for 3 weeks. Running costs amounted to PLN 1,500 and the compensation from the insurer was PLN 8,000. The vehicle was covered by OC and AC insurance and used exclusively for business, the company kept a vehicle mileage log for it and filed the VAT-26 form on time. As a result, it could treat the full amount of running costs (PLN 1,500) as costs and reported the compensation (PLN 8,000) as taxable revenue.
Recording replacement car costs
Recording replacement car costs correctly requires applying the appropriate accounting and tax rules. These costs should be recorded when they are incurred, taking into account the relevant limits and restrictions.
In the KPiR, replacement car costs are recorded in column 15 – Other expenses (the ledger template in force since 1 January 2026). The amounts entered should already be recalculated to reflect the relevant percentage and amount limits. We make such KPiR entries, passenger car limits included, as part of our bookkeeping services.
When recording replacement car costs, keep detailed supporting schedules that allow you to check that the limits have been applied correctly and make any tax inspections easier
Procedure for recording costs
Recording replacement car costs should follow these steps:
- Receive the invoice or bill for expenses related to the replacement car
- Check that the document has been issued correctly (company details, required elements)
- Calculate the amount to be treated as a cost, taking the limits into account
- Determine the amount of deductible VAT
- Enter the data in the accounting records
- Archive the source documents and supporting calculations
Supporting documentation
Keeping proper supporting documentation is crucial for settling replacement car costs correctly:
- Copies of all invoices and bills related to the replacement car
- Calculation schedules showing how the limits were calculated
- Documents confirming how the vehicle is used (exclusively for business/mixed)
- The vehicle mileage log if 100% of VAT is deducted
- Copies of insurance and compensation documents
Supporting documentation should be updated on an ongoing basis and kept until the tax liability becomes time-barred (as a rule, 5 years from the end of the year in which the tax payment deadline passed). Without it, the tax authority may challenge the costs
Differences in settlement for different forms of taxation
How replacement car costs are settled may differ depending on the form of taxation the business owner uses. The most important differences concern business owners taxed under the general rules and those using the flat tax.
Business owners taxed under the general rules, i.e. the progressive tax scale (12% and 32%), apply the cost settlement rules described above, taking into account the percentage and amount limits. These costs reduce the tax base and can lower the tax at the applicable progressive rate.
Business owners using the flat 19% tax (podatek liniowy) apply exactly the same rules for settling replacement car costs. The only difference is the tax rate used to calculate the final tax
Specifics of settlement with mixed sources of income
Business owners who run a business and also have other sources of revenue (e.g. from an employment contract) must pay particular attention to allocating replacement car costs correctly. These costs can be treated only as tax-deductible costs of the business.
If the replacement car is also used for private purposes, the appropriate percentage limits must be applied. However, replacement car costs cannot be treated as tax-deductible costs of other sources, such as an employment contract.
Most common mistakes in settling costs
Practice shows that business owners make a number of typical mistakes when settling replacement car costs, which can lead to the tax authorities challenging the costs. Knowing these mistakes helps you avoid them and settle the expenses correctly.
The most common mistakes are:
- Incorrect application of percentage limits
- Lack of proper documentation confirming how the vehicle is used
- Failing to file the VAT-26 form
- Not keeping the required vehicle mileage log
- Incorrect settlement of insurance compensation
Another common mistake is the lack of proper documentation confirming how the replacement car is used. Without proper documentation, the tax authority may challenge the use of more favourable limits
Mistakes in settlement with compensation
Settling replacement car costs together with insurance compensation received is particularly problematic. Business owners often misinterpret how compensation affects the ability to treat costs as tax-deductible.
The most common mistakes in this area are:
- Incorrect settlement of compensation from OC insurance
- Wrongly treating compensation from AC insurance as tax-exempt revenue
- Omitting replacement car costs when compensation is received
- Incorrect settlement of VAT on costs financed from compensation
To avoid mistakes in settling compensation, it is worth consulting a tax adviser or accountant, especially for large amounts of compensation or complicated circumstances of the accident
Tax inspection of replacement car costs
Car-related costs are among the areas that the authorities often check during tax inspections. The tax authorities pay particular attention to whether vehicle costs, including replacement car costs, have been settled correctly.
During a tax inspection, the authorities mainly check:
- Whether the documentation of replacement car costs is correct
- Whether the limits applied comply with current regulations
- Whether the costs were actually incurred and are related to the business
- Whether VAT has been settled correctly
- Whether the accounting records match the source documents
Inspectors pay particular attention to replacement car costs settled at 100% and to situations where costs are financed from insurance compensation. These areas require particularly careful documentation
Most common findings in tax inspections
Typical objections regarding replacement car costs include:
- No documentation confirming that the vehicle was used exclusively for business
- Incorrect application of percentage or amount limits
- Including private expenses in costs
- Errors in VAT settlement
- Incorrect settlement of insurance compensation
During a tax inspection at a consultancy, the replacement car costs settled at 100% were challenged because the business owner had neither filed the VAT-26 form nor kept a vehicle mileage log. This meant having to pay additional tax, and tax penalties were imposed. The company also had to repay part of the VAT it had deducted.
