Tax-deductible expense

What it means

A tax-deductible expense is one incurred to earn, secure and maintain taxable income, provably borne by the taxpayer and recorded in the books or in the simplified tax records the Act allows instead of them. All three conditions have to hold at once.

An accounting cost and a tax expense are not the same thing. Whatever fails the conditions is added back in the return as an add-back item and becomes a non-deductible expense.

A sole trader need not prove expenses at all after opting for flat-rate expenses. No document is then examined, but actual costs are not claimed either: someone with high real expenses, for materials or subcontractors, pays tax under the flat rate on profit they do not actually have.

How it works in practice

Provability rests on the document and on the link to the business. The tax document alone is not enough: an asset also used privately counts only in proportion, and for some categories the Act sets a cap or a flat rate.

Some costs become deductible only once paid - typically advisory and legal services, contractual penalties, brokerage commissions and rent paid to an individual. The state of payments at the end of the tax period therefore shapes the tax base as much as the invoices do.

At year end we go through the expense accounts with the client item by item. The usual disputed cases are entertainment costs, gifts, fines and private purchases paid with the company card: they belong in the books but not in the tax base, and the return has to add them back.

What to watch out for

A legal services invoice booked in the last month of the year and paid only after it ends raises the tax of the year it was booked and cuts it only in the next one. By the time this shows up while the return is prepared, the decision can no longer be changed.

Creating a bad debt allowance is always an accounting expense, but a tax expense only on the Act’s conditions, chiefly according to how long the receivable has been overdue. Claiming it in full too early understates the tax, and an audit collects the difference together with a penalty.