Sole Proprietor and Tax Deduction: When an Entrepreneur Can Get Back Part of the Paid Personal Income Tax

Many individuals who are entrepreneurs are convinced that their status automatically deprives them of the right to a tax deduction. In fact, this is not entirely true. The law does not prohibit sole proprietors from using this right, but there is an important condition: a tax deduction can be obtained not as an entrepreneur, but as an ordinary individual if there are corresponding incomes.

Due to misunderstanding this difference, taxpayers have the most questions. "Judicial and Legal Newspaper" has clarified who among sole proprietors can claim a tax deduction, which incomes are considered, and under what conditions part of the paid tax can be refunded.

What is a tax deduction?

According to subparagraph 14.1.170 of paragraph 14.1 of article 14 of the Tax Code of Ukraine dated December 2, 2010 No. 2755-VI with amendments and additions, a tax deduction for persons who are not business entities is the opportunity for officially employed citizens to return part of the paid personal income tax. Tax deductions can be used by individuals who are residents of Ukraine. The main condition: you must receive an official salary from which personal income tax is withheld.

Salary includes basic and additional wages, other incentive and compensation payments paid (provided) to the taxpayer in connection with employment relations according to the law (subparagraph 14.1.48 of paragraph 14.1 of article 14 of the Tax Code).

The deduction allows you to reduce your annual taxable income by the amount of expenses incurred for the purchase of certain goods, works, or services from residents of Ukraine.

In other words, if a citizen has incurred certain expenses during the year that the law allows to be considered, the state can return part of the paid personal income tax. At the same time, this concerns specifically the personal income tax, not any other taxes or fees.

The procedure for applying the tax deduction is defined by article 166 of the Tax Code of Ukraine.

Which expenses can be included in the tax deduction?

Expenses that can be included in the tax deduction are:

• Education – payment for education in kindergartens, schools, vocational and higher education institutions (for oneself or first-degree relatives).
• Housing – payment of interest on a mortgage loan.
• Medical services – including expenses for assisted reproductive technologies.
• Insurance – contributions under long-term life insurance or non-state pension provision contracts.
• Charity – donations to non-profit organizations (within 4% of the annual taxable income).

Does a sole proprietor have the right to a tax deduction?

The status of an individual entrepreneur by itself does not grant the right to a tax deduction on income received from entrepreneurial activity. This means that a single tax or taxes paid on entrepreneurial income are not refundable through the tax deduction mechanism.

Entrepreneurial income is not the basis for its calculation. At the same time, the law does not deprive an entrepreneur of the right to use a tax deduction in other cases. If a sole proprietor simultaneously acts as an ordinary individual receiving certain types of income defined by the Tax Code, they can claim a refund of part of the personal income tax. In other words, the key factor is not the entrepreneur status itself, but the type of income the person receives.

When can a sole proprietor use a tax deduction?

The most common situation is when an individual is an entrepreneur but also works under an employment contract. In this case, the employer withholds personal income tax from the employee's salary monthly. This personal income tax can be refunded within the tax deduction if the person has incurred expenses that entitle them to it and has documents confirming these expenses.

For example, a citizen registered as a sole proprietor but also working as an accountant, manager, or doctor under an employment contract can use the tax deduction specifically for income in the form of salary. In other words, in this case, the entrepreneur exercises their right not as a business entity but as an employee.

Right to deduction on income in the form of dividends

The Tax Code also provides another situation where an individual entrepreneur can use a tax deduction. This concerns persons who receive income in the form of dividends from owning shares or other corporate rights of legal entities that have the status of a Diia City resident.

In this case, actual expenses for purchasing the relevant shares or corporate rights can be included in the tax deduction. However, this possibility applies only under conditions explicitly defined by the Tax Code of Ukraine, particularly regarding the timing of acquiring such corporate rights and the status of the Diia City resident company. This is a rather special provision primarily concerning investors in the digital economy sector.

What documents are required?

Having the right to a tax deduction is not enough. The taxpayer must confirm their expenses with documents.

Only actually incurred expenses confirmed by documents are included in the tax deduction. The taxpayer must have:

• receipts, fiscal or sales checks;
• contracts with service providers;
• income cash orders.

The documents must necessarily indicate the cost of goods or services and the date of their purchase or provision.

If it is impossible to confirm the incurred expenses, it will not be possible to use the tax deduction.

How to file a declaration

To receive a tax deduction, you need to:

• Submit an annual declaration of property status and income, indicating the grounds for receiving the deduction and the amounts of expenses. The declaration must be submitted by December 31 (inclusive) of the year following the reporting year.
• Provide copies of supporting documents along with the declaration. Originals must be kept throughout the statute of limitations period.
• Keep in mind that the total amount of the tax deduction cannot exceed the annual income received as salary.
• Special restrictions established by law may apply to certain types of expenses.

It is worth remembering that the right to a tax deduction is valid only for one year. If you do not use it by the end of the year following the reporting year, this right does not carry over to subsequent tax years.

What entrepreneurs should remember

Clarifications from tax authorities once again confirm: the status of a sole proprietor by itself does not deprive a person of the right to a tax deduction. The decisive factor is the source of the income received. If an individual entrepreneur simultaneously works under an employment contract and receives a salary, or has income in the form of dividends in cases defined by the Tax Code, they can use the tax deduction mechanism on general grounds.

Therefore, entrepreneurs should carefully evaluate not only their status but also the structure of their income. In many cases, this allows them to return part of the paid personal income tax if all legal requirements are met and the declaration is submitted on time with supporting documents.

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