When calculating business profits, a business owner may deduct expenses. Naturally, this is only permitted if those expenses are (sufficiently) business-related. When is this the case?
To this end, it must be assessed whether the costs relate primarily to the generation of the profit (deductible – business – expenses) or to the expenditure of the income (non-deductible private withdrawals).
The 100% golden rule is that in this context, the the entrepreneur’s intention is decisive. However, the Tax and Customs Administration is permitted to determine the extent of the costs marginal testing. Put simply: if a business owner buys a car as part of the transport required to generate a profit, the tax authorities should, in principle, not interfere with whether they buy an Opel or a Mercedes. But what if a grocer opts for a Bentley or a Ferrari? Or what if, instead of one car, there are several (vintage) cars registered to the business?
This test is also applied when a business owner wishes to deduct the costs of their hobby (for example, motor racing) or one of their children’s hobbies (for example, horse riding) as advertising costs (sponsorship) against their profits. Similarly, for example, membership of a golf club intended for networking purposes or a business seat at a sports club is assessed by the tax authorities – with the approval of the tax court – against this criterion. Whether the costs can be (fully) deducted then depends on how well the business owner can substantiate their business-related nature.
The best-known example of this marginal test in case law concerns the so-called Cessna judgment. This concerns a situation in which a dentist chose to travel to his company’s branches abroad in a private aircraft (a Cessna). The decision to use the Cessna for business travel was at the entrepreneur’s discretion. However, the tax court has ruled that the tax authorities are entitled to assess whether a reasonable entrepreneur would also incur costs for the Cessna to that extent, having regard to the business interests of the company. If this is not the case, the costs may not be deducted from the profit.
The Income Tax Act 2001 imposes a restriction on the deduction of certain specified types of expenses that are classified as business expenses. This applies (among other things) to the following expenses charged to profit, regardless of whether they benefit the business owner themselves or others:
- food, drink and stimulants;
- entertainment (including receptions, festive gatherings and social events);
- conferences, seminars, symposia, excursions, study trips and the like.
In addition, the following business expenses (among others) incurred for the entrepreneur’s own benefit are not deductible under the law:
- telephone subscriptions relating to lines in his home;
- literature (excluding specialist literature);
- clothing (excluding workwear);
- personal care;
- travel and accommodation in connection with courses and training programmes, conferences, seminars, symposia, excursions, study trips and the like, provided the cost exceeds €1,500.