Business expenses refer to costs incurred in the ordinary course of doing business. Every business will incur costs, which will be offset against income to determine profits and taxes due. Expenses need to be tracked throughout the year usually using various software packages.
What Are Capital and Revenue Expenses?
We can define our expenses into two distinct categories: capital expenses and revenue expenses. Capital expenditure are funds used to acquire and upgrade fixed assets, such as land, plant and machinery, fittings and fixtures or motor vehicles. While revenue expenditure are funds required to manage the day-to-day operations and management of a company, such as wages, light and heat, advertising, telephone. Capital expenditure typically consists of one-time large purchases that will be used for revenue generation over a period longer than a year. Because of this, companies do not deduct the full cost in the year the expense is incurred. Instead, a portion is expensed each year by depreciating the asset over its useful life.
Revenue expenses are short term expenses used in the period in which they are incurred and are dealt with in this manner. They are usually recurring expenses in contrast to the one-off nature of most capital expenditure. These expenses are deducted from income in the year they are incurred.
How Do We Define Deductibility In Relation To Expenses?
The general test of deductibility when considering business expenses is whether the expense has been spent wholly, exclusively and necessarily in the operation of the business. The wholly provision rules out circumstances where an expense is incurred that serves a dual purpose. The full amount of the expense must relate to the operating of the business, in order to be claimed. Exclusive means the expense just related to the business. This rule is only satisfied if the businesses sole purpose for incurring the expense is for the purposes of their trade, profession or vocation.
When we say business expenses are “allowable” this means that the tax rules allow the particular expense to be deducted from trading income when calculating the business profits, on which tax is paid. If an expense is not “wholly and exclusively” used for business purposes, then it is not allowed as a business expense.
Mileage, Subsistence and Other Expenses.
An expense can be claimed for mileage and subsistence incurred in the ordinary course of business. First you need to identify where your normal place of work is. Mileage can be claimed from your normal place of work to your temporary place of work. The rates used to calculate this expense are the Civil Service rates from www.revenue.ie Mileage must be tracked using claim forms and should be done cumulatively each calendar year as rates reduce after a certain amount of kilometres are reached. Subsistence rates can also be found on this website.
Business entertainment expenses are not allowed as a deduction for the purposes of income tax or corporation tax. Entertainment expenses include expenses incurred on the provision of accommodation, food, drink or any form of hospitality. Capital allowances are not granted in respect of assets used for entertainment for income or corporation tax purposes. The provision of a gift is treated in the same way in relation to business entertainment expenses. The non-deductibility of expenses also applies to all payments and expense allowances given to employees and directors for the purposes of business entertainment.
However, expenditure on staff entertainment is allowable as a deduction, provided its provision is not incidental to the provision of entertainment to third parties. These expenses must be reasonable and available to all employees.
Every business expense claimed must have a vouched receipt as backup for the claim. These receipts must be kept for six years after the end of the tax year to which they relate.
When books and records are given to DBASS for accounts preparation, expenses are analysed to ensure they meet the wholly and exclusively test. Any expenses that are not deductible for tax purposes are flagged by our staff. This process is shared in full with the client before any tax returns are completed.
As always, should you require any further information on this or any other subject in relation to your business please do not hesitate to contact us directly on <ph. 01 849 88 00 or firstname.lastname@example.org>.
by Susan Clegg
DBASS Chartered Accountants
This article is for discussion purposes only. For further information on any of the topics covered in this article please contact a DBASS adviser on ph. 01 849 88 00.