Deductible Expenses

Table of Contents

Revenue v Capital Expenses

In calculating the profits of a trade / business, the expenses incurred in relation to that trade are allowed as deductions. “Revenue” expenses only are allowed.

Capital expenses are not allowed but may be allowed against capital gains tax liability in the ultimate disposal of the asset concerned, but not otherwise. For example, repairs are a revenue expense, allowed against profits, while construction of a new building is a capital expense.

What is a capital or revenue expense, generally depends on the nature of the expenditure in the context of the trade or business. The distinction can be difficult to make in some cases. Account is taken of whether the expenditure brings an enduring benefit, the accounting treatment and the nature of the asset.

Distinguishing Revenue from Capital

Generally, if the expense is significant and provides a benefit for several periods, it is likely to be categorised as capital in nature. Otherwise, it is a revenue expense.

The accounting treatment provides guidance but is not necessarily conclusive. An expense may be capitalised and written off over a number of periods but may nonetheless be revenue in nature. Capital expenditure such as capital assets and profits and losses on the sale of fixed assets are not generally treated as income.

Grants of a revenue nature should be included as income. Grant for capital acquisition of for longer term purposes would be treated as capital in nature and not deductible in the calculation of trading profits for tax purposes.

Wholly and Exclusively

Expenditure incurred in the course of a trade is only allowed as a deduction in the calculation of tax, if it is wholly and exclusively for the purpose of the trade. The expenditure must be wholly for the purpose of the trade.

If it has a dual purpose, then is may be completed disallowed. . It may be possible to apportion expenditure between business and non-business (e.g. personal) purposes.

Motoring

There are rules in relation to car and motoring expenses which are designed to limit the amount which can be deducted for tax purposes. Where part of the expenses relate to private use, the expense are apportioned. The regime in relation to cars was changed significantly in July 2008, to make it more favourable to cars with lower carbon emissions.

There is a limitation on the motor expenses allowable with reference to the cost of the car and the emissions categories in which it falls. In the case of cars in the more favourable emission groups (A, B and C) a proportion of the leasing expenses based on €24,000 / the price of the car is allowed.

In the case of cars in the lower categories of efficiency, a percentage and ultimately none of the leasing expenses are allowed as a deduction depending on the emissions category concerned. For cars in the lowest categories no leasing expenditure is deductible. Accordingly the same must be added back.

Finance Act 2023 extends the temporary reduction of €10,000 in the OMV of vans, for the purpose of determining the BIK payable to 31 December 2024. It also extends the tapering relief for BEVs to 2027.

The current OMV reduction of €35,000 will apply for 2024. Therefore, the total reduction for BEVs for 2024 is 45,000. For 2025, 2026 and 2027 the OMV reductions are €35,000, €20,000 and €10,000 respectively.

Leasing and Finance

Loan payments may consist of capital and interest. Only the interest is a revenue expense, and generally, the amount needs to be adjusted.

In the case of leasing expenses, the amount in the accounts may include capital and interest payments. The interest element is included in as a revenue expense.

Finance Act 2023 provides for a number of amendments relating to the taxation of leases. It confirms that in calculating the profits of a trade, the income from a lease (in the case of a lessor) and the lease rental payments ( the case of a lessee) are generally to be spread evenly over the life of the lease, irrespective of how the transaction is recorded in the company’s accounts.

It allows accounting rules to be used for leases that meet a threshold for being treated as financing transactions. These are leases where the burden of wear and tear of the asset falls to the lessee, rather than the lessor, subject to certain anti-avoidance criteria being met. As a result of this amendment, a number of consequential technical amendments were made the provisions operate as intended and to ensure consistency with Capital Gains Tax (CGT) provisions.

There is a restriction on the use of capital allowances in respect of certain leased assets. Finance Act 2023 makes amendments to reflect the lease adjacent activities carried out by leasing groups. The definition of a trade of leasing was modified to remove an artificial demarcation in a company between the receipt of lease rental income and income from its lease adjacent trading activities. Certain loss relief and capital allowance provisions operate in tandem.

Finance Act 2023 introduces a new section which provides for interest deductibility for a qualifying financing company once certain criteria are met. A qualifying financing company is one which obtains third-party finance and advances this finance to a subsidiary for a qualifying business purpose. This section is subject to strict anti-avoidance rules.

Policy Disallows

Certain expenditure is specifically disallowed under tax legislation for various policy reasons. They include the following

The cost of entertaining clients (food drink gifts hospitality (other than exclusively for employees)
interest on late tax payments
Fines
Nontrade subscriptions

In other cases there are special regimes which allow some or all of the deduction

Pensions; not deductible but permitted on a paid basis subject to special provisions
Charitable donations; is not generally deductible but special provisions apply

Provisions

General provisions in the accounts may be disallowed in some cases. However specific provisions for identifiable losses such as bad debts may be allowed. Provisions are allowed where in financial accounts to cover or provide for future possible liabilities arising from past events or transactions.

General provisions and reserves are not allowed as a deduction in the tax computation and must be added back. Specific provisions are usually allowed. For example, a general provision against bad debts is not allowable, but specific provision is likely to be allowable.

Financial Reporting Standard 12 tightens standards for allowing provisions in financial accounts. It requires that a provision for a contingent liability must be reasonably certain, must be a future or unascertained obligation as a result of past event, where it is probable that expenditure will be required, and the expenditure can be reliably estimated. The Revenue will generally allow a provision for expensed and costs in accordance with FRS 12, because it should be sufficiently certain.

Finance Act 2019 confirms that taxes on income are not deductible in computing the amount of profits or gains chargeable to tax under Case I or II of Schedule D. This amendment is intended to clarify in legislation Revenue’s long-held view with regard to such taxes.

Tax itself not Deductable

Entertainment

Business entertainment expenses are not permitted as a deduction in computing tax. This includes food, drink and hospitality provided directly or indirectly in connection with the business.

Entertainment of customers, suppliers and other outsiders is disallowed . However, the provision of facilities for staff unless incidental to client entertainment is generally allowed. A common staff canteen, Christmas party, business promotion and sponsorship etc is generally allowed.

Business gifts are disallowed. Interest on late payment of taxes is disallowed. Penalties and fines etc are not allowed.

Depreciation

Depreciation is a notional write-off of the cost of an asset over time. The cost is treated as an expense and accounting practice allows the cost to be written off over its useful lifetime. Depreciation is dealt under the separate regime of capital allowances. Depreciation in the financial accounts must be added back.

Tax law allows the depreciation, only by capital allowance. Some assets (e.g. office buildings etc) do not qualify for capital allowances at all. Right down (amortisation) of goodwill is not allowed for tax purposes and must be added back .

Depreciation and profits on the disposal of assets are subject to the special provisions in relation to capital allowances. Depreciation is added back but capital allowances are allowed at a later point in the calculation subject to the special rules applicable.

Capital

The proceeds of sale on the disposal of capital assets do not count as income and must be deducted. Expenses relating to the purchase and sale of capital assets are not deductible. Instead, they are dealt with in the capital gains tax computation.

Insurance

Insurance will normally be allowed on capital assets, provided that the premium is for the purpose of the trade.

Key man life insurance is allowed under certain conditions. One of these conditions is that the receipts of the policy are treated as income.

Pensions

Certain expenses are allowed on a special basis. Charges and contributions to pension schemes are allowed on a paid basis only. Unlike with the normal treatment of expenses, it is not enough that the expenses are incurred. They must be paid.

There are also special rules in relation to how exceptional pension contributions are dealt. Certain larger one-off contributions to pension schemes may only be allowed over a number of periods.

Travel & Accommodation

Revenue practice sets out permissible levels of expenses for certain types of deduction. Revenue set parameters for permissible travel expenses accommodation expenses vehicle expenses.

Pre-trading expenses

Pre-trading expenditure may be available as a deduction. It must be of a type that would be available as a trading expense. It must be for the purpose of the new business

Pre- trading expenses incurred in the three years prior to commencement may be allowed as a deduction against the income and profits of the trade.

Losses by reference to pre-trading expenses may be carried forward only. They may not be set against total income in the year concerned.

Post-cessation expenses

Income received after cessation is taxed under the miscellaneous income category. However expenses and losses forward may be deducted against it by way of an exception to the general rule.

Appropriation from stock

Where an asset is held as capital but is transferred to trading stock, the default position is that a capital gain would arise based on its value at that date. The trader may opt to reduce the value of the stock by the capital gain so that it is ultimately dealt with as an income, and the gain is taxed accordingly.

Where assets are taken from trading stock to capital it is deemed to be acquired at its cost at that date.

Upon cessation of the trade the value of stock transfer to connected parties is deemed to be at market value. It is possible to opt to treat this sale is the higher of its cost or its price in the books of account.

Where a profession ceases, work in progress is valued and deemed to be received at market value. An option may be made by a person who carried on the profession to instead treat the receipt after cessation of the trade as miscellaneous income.

Employees

The legitimate expenses of employees are generally deductible This includes salaries and benefits in kind. Remuneration may be disallowed where it is deemed excessive.

Drawings by proprietors are not deductible as they are appropriations of profit. They must be added back in the computation of taxable income.

A special double allowances is available in respect of the employment for certain former long-term unemployed individuals. This is available for the first three years in respect of qualifying employees. In order to qualify, the employee must have been 12 months unemployed or be in certain other categories. A double deduction is allowed in relation to the wages or salary of the qualifying employee in calculating the trading income.

Redundancy payments are allowed. Benefits in kind and expenses are allowed on the basis of Revenue approved rates.

Non-Trade Income

Income appearing in the trading accounts that is not related to the trade, must be excluded. This would include property and investment income Certain grants are non-taxable and are excluded.

Withholding Tax

Professional services withholding tax applies to tax on certain professional fees paid by governmental, semi-state and similar bodies. It covers services such as medical pharmaceutical, veterinary, architectural, engineering, surveying, accounting, financial economic, advertising, legal geological services . Deduction is made and the relevant is made net. A credit is given for the amount of the deductions.