Identifying deductible expenses (Part 1)

When forming a company, misunderstandings frequently occur when it is time to discuss which items of business expenditure can actually be deducted against profits for tax purposes, and which expenses cannot. The line between justifiable corporate expenses and frivolous “personal expenses” can be drawn very thinly, so it is important to clearly and completely identify which expenses can be deducted from your business profits without attracting the undue attention of the tax department during audit time.

Below are the type of expenses that usually invite explanation but in actuality can be legally deducted from your business:

Entertainment expenses

One of the foundations for any kind of calculations that will be applied to your legitimate business expenses is your own income and your personal lifestyle. It would be quite understandable that when you conducting your business that you would avail yourself of services and amenities that would be generally at par with the kind of standards that you would normally enjoy.

Thus, it follows that if you live in posh luxury in an upscale part of town, your needs and preferences would be different from someone who lives on a basic income in a rundown part of the city.

To use an old saying loosely, “One man’s garbage is another man’s treasure.”

Provided with this information, the courts will most often conclude that there have been no acts of dishonesty if you do decide to spend your company’s money in an extravagant fashion. These expenses are justified as long as it was spent in pursuit of a definite business objective like negotiating a deal with a supplier or trying to get a contract signed by a prospective client. Alternatively, it will be hard to justify the business objectives of an expense like throwing a huge party for your son’s school football team.

Property

Placing your company’s offices in the midst of a very opulent location and surrounded by equally extravagant surroundings has become quite an acceptable form of flaunting your company’s success. This situation will, within reason, be regarded by the courts as a decision that is beyond their scope and simply a matter to be discussed by the board of the organisation concerned.

But it the same business acquires a residential property located in a glamourous part of the world where there is no obvious business reason for the company to set up office, tthen the court’s standpoint will (understandly) change.

Meanwhile a board of directors’ decision to buy a posh residential hideaway for company conferences – which just happens to be near a famous golf course, race track, and popular beach destination - will definitely invite a bit of up close official scrutiny.

(To be continued)

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