Non-deductible expense

What it means

A non-deductible expense is a cost the company incurred in its books that is added back to the result when tax is computed. Accounting profit does not change; the tax base does.

The reason is usually one of three: the spending is not connected with taxable income, the law expressly excludes it, or a condition the law attaches to deductibility is unmet (for certain items, payment before the year end).

Permanently and temporarily non-deductible expenses need to be kept apart. A fine or entertainment will never be deductible. For other costs, such as certain provisions and allowances or expenses the law accepts only once paid, deductibility is merely pushed into a later period; it is from such differences that deferred tax arises.

How it works in practice

The category typically covers entertainment, fines and penalties, shortages above natural wastage, private consumption, and part of the cost of assets used privately as well. That is why a usage ratio is set for vehicles and equipment.

These are tracked continuously on separate sub-accounts, not hunted down in March. The same discipline applies to travel allowances above the cap, which are also taxable income for the employee.

At year end we draw up a bridge from the accounting result to the tax base. Each add-back item in it has its own account, amount and reference to the document, so in an audit it can be shown why it was excluded, and the following year it is clear which temporary differences are to be deducted back.

What to watch out for

A company reporting an accounting loss can still have a positive tax base and owe corporate income tax - enough non-deductible items will do it. So the tax result is estimated as the year goes, not at filing time.

With entertainment VAT is often forgotten too. On hospitality and gifts to business partners a payer usually cannot deduct VAT, even though the invoice shows it. Anyone who claims it loses the input deduction in an audit and pays a penalty on top of the amount returned.