Our current and potential clients, legal entities or self-employed persons who also use double-entry accounting, ask us in connection with income tax returns what exactly non-tax costs mean to them. How will it affect their tax return and, most importantly, the amount of their tax liability.
Non-tax costs are defined in the Income Tax Act. These are costs that cannot be considered tax efficient, i.e. they do not directly serve to earn or maintain income.
Typical examples of non-tax costs under Czech law include:
- Late interest and fines paid to state institutions (e.g. fines from the tax office).
- Gifts and contributions which do not exceed the limits set or are not intended for recipients who are legally entitled to receive them.
- Presentation expenses in excess of the established limit.
- Depreciation of fixed assets in excess of the limits set by tax law (e.g., if faster depreciation rates are used than allowed).
- Car expenses in excess of the limit. For example, if the vehicle’s operating expenses exceed a certain amount or if the vehicle is not used exclusively for business.
- Some types of provisions made in the accounts that are not accepted for tax purposes.
These costs affect our accounting profit. We pay them on the basis of invoices or receipts received by bank transfer, credit card or cash. In the accounting records, there must be receipts to support the expenditure of money.
But from a tax perspective, these costs are added to our tax profit or reduced by our tax loss. So we need to remember that we “pay income tax” on them.
Whether an expense directly serves to earn and retain income is sometimes difficult to assess and often involves wordsmithing. Your accountant or tax adviser will be able to reliably assess whether or not it is deductible. We therefore recommend that you regularly check the amount of non-deductible expenses and consult your accountant or tax adviser. It is quite possible that you may find unnecessary costs that can be avoided and thus not unnecessarily reduce your bottom line.
