Food, drink, luxury items, entertainment expenses, conferences, seminars, symposia, excursions and study trips are all mixed expenses. According to the law, these expenses are of both a business and a personal nature. Mixed expenses are therefore only partially deductible from profits.
The general rule
The basic principle is that every business incurs mixed costs. The business is entitled to charge these costs in full to its profits. Naturally, these must be costs that serve the business (business expenses).
However, due to their mixed nature, €4,500 of these costs is not deductible. This non-deductible portion of the mixed costs is added to the profit in the income tax or corporation tax return.
For corporation tax purposes, the non-deductible portion of mixed costs may be higher. This is the case if 0.4% of the company’s total wage bill exceeds the threshold of €4,500.
Example
Company X has made a profit of €125,000. This includes a wage bill of €1,500,000.
In that case, the following amount of the mixed costs is not deductible: 0.4% * €1,500,000 = €6,000. The taxable amount for corporation tax is: €125,000 + €6,000 = €131,000.
Low overheads
If a company has few mixed costs, it may opt for the exception. In that case, the restriction on the deduction is based on the actual amount of the mixed costs.
For sole traders and partners in a partnership or general partnership (VOF), 20% of the actual mixed costs is not deductible. This percentage applies to the 2017 tax year.
In 2016 and previous years, 26.5% of the mixed costs is not deductible.
From 2017 onwards, therefore, a larger proportion of mixed costs can be deducted. However, this does not apply to corporation tax, where the rate of 26.5 remains in force.
Example:
For income tax purposes, Jan is classified as a self-employed person. His mixed expenses amount to €3,000.
Jan may opt to adjust the deduction on the basis of the actual mixed costs.
In 2016, this amounts to an adjustment (addition to profit) of 26.5% of €3,000 = €795. This is considerably less than the adjustment based on the main rule, which would amount to €4,500.
In 2017, the adjustment is lower: 20% * €3,000 = €600.
The example shows that, as a business owner, it is important to ascertain the extent of the mixed costs. Based on this information, it is then possible to determine which method is more advantageous and therefore results in a larger tax deduction.
Wage costs are fully deductible
Expenses classified as wages are not subject to the deduction limit. These expenses are therefore fully deductible. All allowances and benefits in kind paid to employees, which are subject to payroll tax, qualify as wages. Expenses falling within the WKR’s discretionary allowance are fully deductible from profit as wage costs.
Advertising and sponsorship costs
Advertising and sponsorship costs are also not subject to the deduction limit. For example, a wine merchant who offers a glass of wine to customers who happen to drop by, for promotional purposes, does not encounter the deduction limit in respect of these costs.
Split off
It is not necessary to allocate costs that represent a negligible proportion of other costs for the purposes of the deduction limit. For example, there is no need to allocate a portion of the cost of an air ticket to the meal consumed during the flight. The cost of the flight ticket, if incurred for business purposes, is fully deductible.