One of the most common questions for new entrepreneurs is as follows: "What expenses are deductible in bookkeeping?"
In its simplest form, this could be answered by stating that all expenses that can be directly expected to promote business activities are deductible in accounting. However, this summary may not ensure a complete understanding of deductions. In this article, we aim to describe as accurately as possible which products or expenses are deductible, especially for a limited company.
In the UKKO Entrepreneur service, you can add your company's expenses directly to the service.
To add an expense, you need a receipt, such as a purchase receipt or purchase invoice in PDF format. When adding an expense, the service guides you in correctly classifying the expense for bookkeeping entries and asks for additional necessary details. Always remember to allocate the bank transaction to the expense!
The UKKO Entrepreneur team processes your expenses, asks for additional information if necessary, and adds the expense to your bookkeeping. The UKKO Entrepreneur service also handles the submissions of periodic self-initiated tax returns, commonly known as VAT returns, and if necessary, the EU summary declaration. At the end of the year, the service fee includes the preparation of the tax return and financial statements.
Deductible expenses for a limited company:
Here is a list of deductible expenses. The specific expense categories are detailed below the list.
Direct purchases related to business and costs related to the establishment of the company:
- Such as consumable tools and supplies, or other costs included in the executor's invoice.
- Planning the establishment of the company, applying for permits, and possibly purchasing business advice.
Additionally, costs supporting and developing business conditions include:
- Office supplies
- IT software and licenses
- Telephone expenses
- Small acquisitions
- Marketing expenses
- Office/workspace expenses
- Representation expenses
- Professional and trade journals
- Entrepreneur's YEL expenses/pension expenses/pension contributions
- Insurance premiums
- Membership fees for organizations
- Financing and interest expenses
- Expert services
- Work clothes and equipment
- Donations and sponsorships
- Salary and personnel expenses
Office supplies that can be deducted include items such as:
- Pens
- Notebooks
- Stamps
- Similar small consumable items used in normal office usage.
Costs for IT software and licenses can be deducted. These may include, for example, Microsoft Office software license fees and other software and licenses necessary for your business – for a photographer, Adobe Photoshop could be one such expense.
The owner-entrepreneur's phone bill can be deducted if the phone subscription is in the company's name. In this case, the taxable value of the phone benefit for the entrepreneur is 20 euros per month.
Small acquisitions may include:
- Printers
- Phones
- Laptops.
It's important to note that during the tax year, small acquisitions can be deducted up to a maximum of 3,600 euros and 1,200 euros at a time. If the expected useful life of the device or acquisition is three years or less, the purchase can be deducted at once without monetary limits.
Marketing expenses are deductible. This includes, for example, printing the company logo on work clothes.
Office and workspace costs:
An owner-entrepreneur of a limited company working from home can claim a workspace deduction in their personal taxation, similar to regular salaried employees.
However, the entrepreneur can also rent a separate workspace within their residence to the limited company. In this case, the entrepreneur incurs taxable rental income in personal taxation, and the limited company incurs deductible expenses. The entrepreneur can deduct from the rental income a portion corresponding to the area of the workspace from the household expenses. A normal rental agreement is made, and the rent must be at a true market price.
The limited company can also rent a separate office or commercial space from the general market, and the rent payment is normally deductible.
Representation expenses can be partially (50 %) deducted when the expenses are related to improving customer relationships and acquiring new customers. Representation expenses include costs that could otherwise be considered negotiation expenses but have an unusually high cost, i.e., costs higher than a typical lunch. No VAT deductions are allowed for representation expenses for a limited company.
Professional and trade journals subscribed for the company's use can be deducted (newspapers only if they are delivered to the company's premises, not the entrepreneur's home). Professional literature also falls into the same category.
YEL (entrepreneur's pension insurance) premiums are deducted as company expenses when paid from the company's account.
Other industry-specific insurance premiums (such as patient injury or liability insurance) and the entrepreneur's accident insurance can also be deducted as business expenses.
Membership fees for industry-related organizations are deductible business expenses for tax purposes. Membership fees for the Federation of Finnish Enterprises and its local branches can also be deducted.
Membership fees for the entrepreneur's unemployment fund and any professional associations are deductible only in the entrepreneur's personal taxation.
Membership fees for charitable organizations, political parties, or associations are not deductible.
Providing occupational health care for employees is mandatory, but it is not mandatory for the entrepreneur (for yourself).
If the entrepreneur makes business-related purchases on installment or with a credit card, the resulting interest and financing costs are deductible. This also applies to interest and costs for loans taken for business purposes.
If you use the services of an accounting or law firm, or a consulting company for your business, these costs are deductible.
Work clothes and equipment are generally considered business expenses only when they are not expected to be used elsewhere but in work tasks.
Donations and sponsorships are deductible business expenses when there is some form of consideration for the money. This includes, for example, advertising space on a sports uniform or mention in a match program or the club's seasonal publication. However, the paid amount cannot be unreasonably high in relation to the visibility received.
A small donation, up to 850 euros, for a charitable and local purpose – such as to a junior sports club, organization, or association – can also be considered a natural cost of public relations. In this case, it is deductible even if the donation does not result in the mentioned advertising visibility.
For limited companies, a donation over 850 euros is also deductible if it is made for the advancement of science, art, or the preservation of Finnish cultural heritage (donations for political purposes are not deductible).
Salary and personnel expenses:
In a limited company, the salary paid to the entrepreneur, daily allowances, and mileage reimbursements are deductible expenses for the company's taxation. The same applies to the salaries of any employees and their associated costs.
The owner-entrepreneur of a limited company can also take advantage of benefits in kind, such as meal, phone, and car benefits. You must separately report these granted benefits to us so that we can take them into account in your payroll.
If you have employees, you need to handle their payroll, associated payments, and official notifications yourself. However, we record the salaries in the bookkeeping based on the payroll receipts you provide.
Non-deductible expenses for business:
Not everything can be classified as a business expense. In addition to the exceptions mentioned earlier, non-deductible expenses include, for example:
- Parking fines
- Other penalty-type monetary penalties
- Tax authorities' delay penalty fines with interest
- Costs unrelated to income generation or its preservation.
Perhaps the most common example of a non-deductible expense is a visit to a hair salon. This is considered a private living expense for the entrepreneur, even if a presentable appearance is advantageous for business.
These rules, unfortunately, are not without exceptions, so it is advisable to confirm the eligibility of deductions with the tax authorities.
When you add an expense to the UKKO service, our team reviews the expense and the receipt. If the expense cannot be deducted, you will receive a message from us along with possible requests for additional information on the expense details. We always aim to seek clarification if the connection to your business is not clear from the expense.
Remember: Adding an expense requires a receipt showing the purchase or expense with the VAT rate. This is especially important when paying with a card terminal – ensure you get a receipt with the purchase and VAT details separated. Often, receipts printed by card terminals only show the total amount.
If an individual receipt is lost, you can create a self-explanatory statement indicating what was purchased, when and where the purchase was made, and its cost. The expense can then be recorded in the accounting, but the right to deduct VAT from such self-created receipts is not applicable.
This means that the VAT portion of the purchase cannot be deducted from your sales' VAT. If multiple receipts are lost, you may end up paying more VAT to the tax authorities during the year than necessary. Therefore, we recommend promptly taking a photo of receipts with your mobile phone and adding expense entries to the UKKO service soon after the purchase.