If you handle business expenses on an everyday basis, you might have come across some receipts and invoices for costs that employees incurred that, if you were to submit them for tax deduction, you would be at risk of a tax audit and subsequent penalty. These are called non-deductible expenses, and it’s important to consider them during your expense management process so you can avoid the risk of fraud and fines.
If you’re a part of a Finance team and you’re handling invoices and receipts from multiple employees, it’s fairly easy to get caught up in the net of endless expenses. One of the first things to keep in mind is that expenses can be divided into three categories: deductible, partially deductible and non-deductible.
As long as your local government considers it a necessary related cost for your business to operate, an expense can be deductible for tax purposes.
Most business expenses are eligible from tax deductions, meaning a company can subtract them from its income before it is subject to taxation. Such expenses include hotel stays during business trips or paying for office supplies. As long as your local government considers it a necessary related cost for your business to operate, its costs can be deductible for tax purposes.
That being said, which expenses are deductible depends on the local legislation to which your company is bound. There are some expenses that, according to local regulations, can only be partially deductible, while others are typically considered to be non-deductible, like most personal activities and expenses.
Table of contents
- Which expenses are non-deductible?
- The importance of proof-of-expense
Which expenses are non-deductible?
Ultimately, it all comes down to local regulations. Whilst, for instance, client gifts in Germany are deductible up to 35€, in Belgium the amount raises up to 50€. It’s always best to check local laws and regulations, given that most of them are regularly updated, so these rules can change.
Regardless of local laws, there are some expenses that are typically considered to be non-deductible. Anything that has to do with personal spending would be considered non-deductible, even when that expense is incurred during business hours. For instance, if you go out to lunch with friends or fill up your gas tank on the way to work, those expenses are not considered to be deductible. Below, you’ll find some examples for some non-deductible expenses.
Personal Expenses
All expenses that are not directly related to the business cannot be considered deductible. Costs such as the use of a car outside of business hours or a personal cell phone cannot be deducted.
The same applies to other expenses such as rent. Even if an employee works from home, rent is considered a non-deductible expense. The same goes for clothing or other forms of entertainment.
Political Contributions
Employees might feel passionate about certain causes, like sustainability, but whenever they make a contribution, even if they do it because the cause supports their business industry, the cost cannot be deducted.
Any political contribution is considered a non-deductible expense, however the nature. The same applies for charitable contributions.
Anything that has to do with personal spending would be considered non-deductible, even when that expense is incurred during business hours.
Commuting
If an employee chooses to use a personal vehicle for their journey to and from the office instead of using public transportation, those costs are considered non-deductible expenses.
However, if they need to use their car for a trip to attend a meeting, buy office supplies or other work-related obligations during business hours, the expense for the mileage incurred can be deducted.
Illegal expenses & penalties
When engaging in any illegal activities, such as gambling, even if it’s for client entertainment and during business hours, the costs are considered non-deductible expenses.
The same applies for all fines and penalties incurred during business hours. If an employee happens to get a ticket during a work trip, or break the law in any other way, the cost cannot be deductible.
Gifts over a certain amount
Gifts are an exception to this rule, as they’re partially deductible. A company can spend as much as they want in gifts for clients, employees or partners, but only a certain amount can be deducted.
Companies should reach out to local entities to understand what the limit has been established by their local government. After that amount has been exceeded, a gift is considered a non-deductible expense.
The importance of proof-of-expense
Imagine a situation where one of your employees submits an expense stating that they spent over 50€ on a dinner, without any further information. Both managers and Finance controllers are entitled to raise questions, the number #1 being “why did this expense happen in the first place?”
This is why employees need to submit proof-of-expense, and that can come in many forms. Receipts and invoices are the most obvious forms of proof-of-expense, and help clarify a few questions such as the date, number of people involved and place where the expense was incurred. Without submitting any documentations that attests to the expense, that amount cannot be reimbursed nor deductible.
At times, and in situations such as the dinner stated above, an employee might need to provide further information as to explain how that expense relates to the business. These records must then be kept by the Finance team in cause of an audit, so it can attest to why that expense was deducted.
Without submitting any documentations that attests to the expense, that amount cannot be reimbursed nor deductible.
Keeping track of all of these expenses and maintaining these records can, however, become a pain-point to Finance teams, especially if they’re using a traditional bookkeeping method. Using a digital expense management software like Rydoo can make this process seamless and is much more reliable in the long run, when compared to manual options.
With Rydoo, if one employee has dinner with a client, they simply open the app, scan the receipt for the meal, and when submitting, they have all the necessary fields to insert the expense details available. That allows them to provide enough information about the motives for the dinner, the number of people that attended and if the bill was split or not and even the payment method, which allows for the possibility to distinguish between reimbursable and non-reimbursable expenses, making it even easier to track.
For managers and controllers, it’s even more painless, as they have the possibility to set Expense Rules within the software and establish which expenses are considered non-deductible. This not only makes the expense management process seamless, but further simplifies the identification of these expenses. Whenever a non-deductible expense is submitted, employees get a warning of non-compliance and they can either remove or update the expense before submitting. If the expense is submitted, both the approver and the Finance team get the same notification, making the process even clearer and simpler for both parties.
Learning how to decode and navigate the often complex map of non-deductible expenses is essential for your business. Digital expense management solutions like Rydoo can help simplify this process, by making record-keeping easier and streamlining the entire process. Furthermore, a digital system can help ensure compliance with tax regulations, provide audit records and, ultimately, help your company avoid unnecessary risks and costs.
As a seasoned expert in business finance and expense management, I can attest to the critical importance of understanding the nuances of deductible and non-deductible expenses. My extensive experience in this field allows me to shed light on the intricacies of expense management, providing valuable insights into the concepts mentioned in the article.
Deductible Expenses: Deductible expenses are crucial for businesses seeking to optimize their tax liabilities. These are costs that your local government deems necessary for your business operations and allows you to subtract them from your income before taxation. Examples include hotel stays during business trips and expenditures on office supplies. It's essential to note that the deductibility of expenses varies based on local legislation.
Partially Deductible Expenses: Some expenses fall into the category of partially deductible. For instance, client gifts may be deductible, but there's often a limit imposed by local regulations. The article mentions that in Germany, client gifts are deductible up to €35, while in Belgium, the limit is €50. Staying informed about these limits is crucial to ensuring compliance with tax laws.
Non-Deductible Expenses: Understanding non-deductible expenses is paramount to avoiding tax audits and penalties. Personal expenses, such as using a car outside of business hours or personal cell phone costs, are generally non-deductible. Other examples include rent (even for home office use), clothing, and entertainment expenses unrelated to the business.
Political and charitable contributions are also considered non-deductible, emphasizing the importance of discerning between business-related and personal expenditures. Moreover, commuting costs using a personal vehicle for routine travel to and from the office are typically non-deductible, unless incurred for work-related purposes during business hours.
Engaging in illegal activities, fines, penalties, and gifts exceeding a specified amount are additional examples of non-deductible expenses. It's crucial for businesses to be aware of local regulations governing these expenses, as rules may vary.
Proof-of-Expense: The article rightly underscores the significance of maintaining proof-of-expense. Receipts and invoices serve as crucial documentation, providing details like date, participants, and the location of the expense. Without proper documentation, expenses cannot be reimbursed or considered deductible.
Employees must be diligent in submitting comprehensive proof-of-expense, especially for items like client dinners. Digital expense management solutions, such as Rydoo, streamline this process, offering a user-friendly platform for submitting and tracking expenses. These systems not only enhance efficiency but also assist in compliance with tax regulations.
In conclusion, navigating the complexities of deductible and non-deductible expenses is pivotal for effective expense management. Employing digital solutions like Rydoo not only simplifies record-keeping but also mitigates risks, ensuring compliance and ultimately contributing to the financial health of the business.
