Are your business expenses exclusive?

Getting your head around deductible expenses for tax purposes

It’s getting round to that time of year again were small business owners are seriously thinking (perhaps panicking!) about getting their tax returns completed.

There always seems to be an increase in inquiries around this time, extending to late October, about what deductible expenses for tax purposes.

For a business expense to be deductible for tax purposes it must be incurred:

  1. Wholly,
  2. Exclusively

…for the purposes of the trade.

There are also certain expenses that are specifically disallowed, such as client entertainment.

Let’s look at each of these requirements individually:

  1. Wholly

    This doesn’t generally cause a problem. If the “whole” of the expenditure isn’t business related (such as light & heat for a home office, or motor running costs) then it can be apportioned on a reasonable and appropriate basis between business and non-business.

    A reasonable and appropriate basis for the examples given might be floor area for light & heat (office v rest of house) or business mileage as a proportion of total mileage for motor expenses.

2 .Exclusively

Not so straightforward! It is often incorrectly interpreted as meaning “if you wouldn’t have incurred the cost if you weren’t in business then it must be allowable”. This is not correct.

What it actually means is

the sole purpose of the expense must be for the purposes of the trade.

This is best demonstrated by way of example:

John works from home, juggling childcare and business responsibilities. His wife works full time. When the children are not in school and he needs to attend a meeting granny or Aunty Jane usually look after the children. Sometimes, though, if they are not available he leaves them with the childminder, which costs money.

John argues that if he didn’t have to go to the business meeting he wouldn’t have had to pay the childminder and therefore the expense should be an allowable deduction for tax purposes.

This is not the case.

The expense is incurred as a result of the children needing to be looked after. The children need to be looked after regardless of John’s business commitments. The sole purpose of the expense is to look after the children. It is therefore not an allowable expense for tax purposes.

When trying to determine whether a particular expense is allowable or not the following is a good approach:

  1. Assume it is not allowable
  2. Look for a specific provision that either allows or disallows the expense (Revenue website is a good place to start)
  3. If you can’t find anything determine whether the sole purpose of the expense was for the trade, ie what did you pay for ignoring the circumstances which led to you needing it?
  4. Seek professional opinion.

Never use the “expression of doubt box” on the tax return form for this type of query. Ninety-nine times out of one hundred the treatment of a particular expense will be well established. Revenue get a little annoyed when the expression of doubt is used inappropriately.

I’m always happy to help with any specific queries so feel free to call or email.

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