Deductible Expenditure

Basic Principles

Accounts are almost always made up on a accruals basis. This is usually required by accounting standards. Income is calculated on the basis of income earned and expenses, incurred notwithstanding that the timing of the cash receipt and payment may differ. Expenditure must be referable to the accounting period concerned.

Expenditure may be deducted if it is income in nature and it is wholly and exclusively referable to the trade. As in the context of income tax, this may raise difficult issues of interpretation some cases. It must be revenue as opposed to capital expenditure.

Certain categories of expenditure are specifically disallowed and may not be deducted in the calculation of trading income.

Wholly and Exclusively

Deductible expenditure must be wholly and exclusively for the purpose of the trade. This is a wider test than that for the deduction of expenses by an employee which also requires that the expenditure be necessary. Provided the expenditure is wholly and exclusively for the purpose of the trade, its necessity is not considered.

Expenditure which has another purpose is not exclusively for the purpose of the trade. Where expenditure is for business and non-business purposes or is related to the trade and another trade, it may be apportioned.

The expenditure must be bona fide for the purpose of the trade. Where it is for something else, such as the personal benefit of directors or connected parties, it is not deductible, as it is not an expense of the trade.

Revenue not Capital

The expenditure must be revenue as opposed to capital in nature. Similar considerations as apply in respect of trading and income v capital, apply in this context. Deductible expenditure is more likely to be recurring than one off. However, a one-off payment may be shown to be revenue in nature.

The nature of the transaction in the context of the business will be relevant. As with income, what might be classed as deductible expenditure in one business might be non-deductible capital expenditure in another. How the expenditure is treated in accounts can be highly significant.

Special Treatment by Law

Income is calculated on the basis of income earned and expenses, incurred notwithstanding that the timing of the cash receipt and payment may differ. Bad debt relief may be claimed if income is not ultimately received. Where there is an increase in a provision, it will not be allowed save to the extent justifiable on accounting principles as modified.

Business entertainment expenditure is generally disallowed. This covers food drink and gifts as well as other associated benefits in kind for clients and customers. Entertainment exclusively for staff is permissible subject to conditions.

Certain types of expenditure are disallowed for policy reasons such as fines , interest and tax penalties.

Charitable donations are not generally deductible. There is a special relief or corporate donations over €250 per annum which is subject to particular conditions.

Expenditure on the purchase or leasing of cars and on car running expenses is subject to statutory restrictions. Restrictions in relation to purchase arise in the context of capital allowances. There are incentives in some case which increase the allowance.

Leasing expenses are  restricted with reference to the value of the car to a benchmark of €24,000 and to the emissions category of the car The effect is to restrict deduction of leasing expenses to the extent the retail price of the car exceeds €24,000 and by reference to emissions benchmarks. See the separate sections for more details

Expenditure on research development patents and knowhow will be commonly a capital expenditure. Specific statutory provisions allow for credits and deduction subject to conditions. See the separate sections.

Expenditure which might otherwise be disallowed but which is subject to income tax as benefits in kind in the hands of a shareholder director is allowable as a deduction.

Salaries & Directors Fees

Salaries paid to directors and shareholders are treated in the same way as other employment income. They are a deduction in the calculation of corporation tax.

The company must account for the tax liability of the recipient under the PAYE system. A director is always subject to PAYE, regardless of whether or not he is an employee.

Contributions to employee and director pension schemes are subject to special provisions which are dealt with otherwise. They are allowed only when paid.

Where the contribution is deemed special and in excess of the regular contribution the deduction is spread over a period of up to five years. Payments of special contributions up to the greater of  ordinary contributions made in the period or €6350 are allowed.

Dividends & Distributions

Dividends and distributions are not deductible for corporation tax purposes as they are distributions of profits to the shareholders of the company and are not expenses of the company in the conduct of its trade as such. The payments are subject to dividend withholding tax which must be accounted for by deduction of tax at the standard rate followed by a monthly return.

Distributions include de facto dividends including dividend like or de facto dividend arrangements, as well as certain capital redemptions. Accordingly, transfers of assets and benefits received etcetera, may be dividends if they are not benefits in kind to an employee. The close companies legislation which are the subject of another chapter deems a wide range of payments to be distributions for tax purposes.

Interest

Interest annuity and annual payments are disallowed at this point in the calculation. However they are potentially deductible as charges. See the separate section on charges.

Interest  on borrowings for the purpose of a trade or profession is not allowed as a deduction but may be allowed as a charge subject to conditions. Interest payable to controllers of the company or persons connected with them is deemed a distribution, is not deductible and is subject to income tax in the hands of the recipient. See the section on close companies.

There are special provision by which interest on borrowings to acquire a capital asset for use in the business including  premises plant or equipment is allowed as a deduction notwithstanding its capital nature.

Interest paid on loans between connected entities is restricted save where it is for the purpose of purchase of stock plant or machinery. Interest paid to another company is not deductible as a trading expense where it is not equally taken into account as a taxable receipt of the recipient.

There are various other restrictions on the deduction of  interest.

Stock upon cessation

Stock held upon cessation transferred to an unconnected trading party is taxed on the price or value received

Stock transferred to a connected party is deemed to be transferred at market value. Subject to conditions it is possible to elect opt to treat the transfer as at the higher of the cost or the value in the accounts (if lower than the market value)

Similar provision applies to work in progress in the hands of a profession which has ceased. It is taxed at the price or value received. If transferred to a connected party, market value is deemed to be received.

Work in progress which is not sold is deemed to be disposed at market value subject to the possibility of opting to have it treated as a post cessation tax receipt.

Doubtful Debts

Finance Act 2019 defines the term “doubtful debts to the extent that they are respectively estimated to be bad” for corporation tax purposes. This  is required to take account of developments in accounting practice, resulting in the agreement of International Financial Reporting Standard (IFRS 9) for the calculation of impairment losses.

It is  deemed to have applied as respects accounting periods beginning on or after 1 January 2018, the date from which users of IFRS were obliged to apply this standard.

Pre-trading

Some classes of income and expenditure are to be included notwithstanding that they fall outside the relevant accounting period. Pre-trading expenses in the three years prior to commencement incurred wholly and exclusively for the purpose of the relevant trade or profession, may be deducted in the first year of trading.

There are restrictions on the type of costs that may be allowed. They may be allowed only against future income of the same trade.

Post-Termination

When there is a cessation of trade there may be implications for other tax purposes. See generally other sections. Terminal loss relief is available. Apportionment of profits and losses may be required.

Income and receipts following cessation of the trade are separately taxable  under a separate non-trading class of income (Sch D Case IV)(generally 25% tax rate).

Capital expenditure

Expenditure on capital assets and depreciation are not deductible in the calculation of trading profits as such. However as with income tax, capital allowances are available for a wide range, but not all capital expenditure. Allowance provisions specify the percentage deduction allowed and the period over which they are taken. This calculation is done separately after adding back capital expenditure and depreciation in the accounts, for the purpose of calculating trading profit.

The treatment of capital allowances in corporation tax differs slightly to that in the case of income tax. Capital allowance is allowed as a deduction in calculating taxable income in the case of corporation tax where it is comes below the line’ (after calculation of profits) in the case of income tax.

As with capital allowances for individuals the relevant  asset  must be in use at the end of the relevant period. In this case, the accounting period rather than the calendar year I used. The full allowances are available only in respect of a 12 month period so that if the accounting period is shorter, they are reduced proportionately.

There are many incentive capital allowances which are available only to companies under recent legislation. Most relate to significant business expenditures and have not been afforded to personal traders as such.

Appropriation from or to trading stock.

An asset this is capital in nature in the sense that its disposal will be subject to capital gains tax and not income tax, may be appropriated and become trading stock so that its sale would be subject to income tax. It is deemed to be disposed of at its market value when it is appropriated. This would trigger a capital gain.

However, the company can opt to reduce the value of the assets held as stock by the amount of the capital gain tax. Accordingly, the deduction allowed will be reduced for the ultimate income/profits tax calculation. Where there is a loss in the capital gain calculation the value of the trading stock is not permitted to be increased.

Where an asset that is part of the trading stock of the company in the sense that its sale would be subject to income tax, is appropriated to be held as capital (in the sense that its disposal would be subject to capital gains tax) is deemed to be acquired by the company at original cost.