Including a non-deductible expense in your accounts can end up in an increment of the tax liability ( when it is removed) and a fine. Find here a list of expenses that you cannot include in your books.
First the obvious.
For any expense to be included in the book it must be:
- Properly Documented. In the great majority of cases this means having a valid invoice issued to the business legal name.
- Necessary to the business activity.
Despite meeting these criteria there are some payments that, no matter how well documented or necessary, will not reduce the tax liability.
IVA paid in your purchases. (With one exception)
Normally the IVA included in our purchases is treated separately and only the before-IVA amount (base) is a deductible expense.
However if you make purchases in other EU country and obtain an invoice with foreign VAT you will include the total , including the VAT , as expense. ( As you cannot offset foreign VAT against the IVA collected in your sales you are allowed to offset it against Income Tax).
Also, if you are under the Retailer’s Tax System, the IVA is a deductible expense.
No need to say that the quarter IVA payment is not an expense either!
Income Tax paid.
The payments made in concept of income tax are not tax deductible.
However it is a business deductible expense the tax paid for other concepts such as property tax (if the property is owned by the company) or tax paid to the town hall to obtain a trading license.
Fines and overcharges.
It is not tax deductible the fines and overcharges that we pay to the Tax Office or Social Security. To give an example, if we miss a payment of the regular autonomo fee we will need to pay an overcharge, however we can only include the principal amount in our books.
Paying back a loan.
The paying back of a loan is not an expense, as much as receiving a loan is not an income for which we need to pay tax.
The confusion can arise if we use the loan to buy an asset. Say for example that we obtain finance to buy a car. We will pay the loan back in 4 years. Someone may understand that with every payment of the loan he is paying the car, therefore it should be considered a deductible expense… Logical as it may seem, the answer is no!.
The cost of assets is offset against tax as they depreciate, or lose value, along their utility life. The official depreciation tables indicate how quick each type of asset devaluates.
In the case of a car, the faster it can be depreciated is 6.25 years. This means that even if we pay the car in less than that we can only offset a maximum of 16% of its value every year ( 16% for 6.25 years is 100% of the value)
There are other concepts that are not tax deductible when they exceed a particular amount. In each of the following categories you will need to consider specific rules for each case.