Calculating your profit for tax purposes

When calculating your profit (or loss) for tax purposes you must be aware that your business expenditure falls into 1 of 2 categories: “allowed” and “disallowed”.

This is not an exhaustive analysis but a brief overview of the basic concepts that can cause most difficulty.

Capital expenditure

Any equipment you buy should go into your balance sheet as a “fixed asset”. But be sensible about it – a €50 printer could happily go through the profit and loss account as an expense.

The cost of fixed assets is “drip-fed” into the profit and loss account over the life of the asset. Eg a lap-top costing €1,000 might last you 3 years so you would charge €333 to the profit and loss account each year.

This is called “depreciation”. The balance sheet amount is reduced by €333 and your profit is reduced by €333.

Neither capital expenditure nor depreciation are allowable expenses for tax purposes. Instead you get “capital allowances” at 12.5% of the cost of the equipment. You can deduct the 12.5% from your profits for up to 8 years – provided the equipment is still in use in the business.

When the equipment is no longer in use you basically get the remainder of the unclaimed capital allowances (less any cash you got from selling it).

The income levy is calculated on profits BEFORE capital allowances.

Certain energy efficient equipment has a capital allowance rate of 100% – so you can claim the full amount in year 1.

Entertainment

Staff entertainment good – client entertainment bad!

Business v pleasure

Obviously, only business expenditure is allowed. I say “obviously” but I’ve seen some crackers being slipped into business accounts. The best (or worst) is probably a full wedding (hotel, dresses flowers the works) closely followed by purchases from an adult store – do some people have any shame?!

The test is the expenditure must be wholly and exclusively for business purposes.

There are circumstances where expenditure may not be “wholly” for business purposes – such use of a car. In this case you would split the cost between business and personal use and claim for the business portion.

If it’s not exclusively business (eg golf club membership) – forget about it.

Fines

Parking fines, tax penalties and interest and other fines are not allowed regardless of whether they were incurred in the course of business or not.

Home office

Costs of running a home office are allowed – but see business v pleasure above.

Things to claim are telephone, electricity, heating – apportioned on a reasonable basis, eg floor area. If you rent claim part of the rent. If you own your home don’t claim for mortgage interest or building insurance. If you operate through a limited company don’t charge the company rent.

There is a catch when running a home office – it must not be used solely for business. There must be some element of personal use of the space. Eg let the kids use your office to do their homework. Otherwise you could have difficulties with capital gains tax if you ever sell.

Travel

Cost of business travel is allowable.  However, be sure to keep accurate records of journeys taken, including date, destination, purpose, distance etc.

Where you use your own car  the business portion of the running costs are allowed.  The business portion should be calculated as a proportion of business miles over total mileage.

Travel costs in respect of journeys from home to the business premises are not allowable.

 

These are some of the more common expenses that cause problems for small owner managed businesses.  It is by no means an exhaustive list.

For more guidance on this area see this blog post or feel free to ask us about any specific expenditure you are unsure about.

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