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Tax Deductibility

In principle, any cost "defrayed for the obtaining, securing and maintenance of income" is set off in the tax accounts against the company´s net income.

Most of a company´s expenses must be set off against its income before calculating the company´s tax on profit. Like this:

+ Income
- Less expenses
= Profit (the owner´s salary if it is a sole propriorship)

Three sources of doubt

Usually, it is not difficult to verify a given expense´s (cost) relation to the business, however, it is not all that simple. Three sources of doubt:

  1. When an expense is partly business partly personal expenditure.
  2. Many expenses are not fully deductible at once, but are subject to depreciation (partial deduction over a number years).
  3. Certain types of expense which are undoubtedly business related are not deductible.

1. Private or business related

Grey zone expenses are:

  • car,
  • phone,
  • clothing,
  • rent, and
  • travelling expenses.

Car

Many entrepreneurs start out using their private car for business purposes while still using it privately. In such events you are allowed to deduct part of the car expenses as operating costs in your tax accounts. This can be done in several ways:

The most common method is to keep track (mileage log or likewise) registering your commercial driving. Having done this you can grant yourself car allowance so to speak. It is not an amount paid from "one hand to the other" - a verified car allowance is deductible as an operating cost.

2015 km rates are 3.70 Dkr. for the first 20,000 annual km. For excess km the rate is 2.05 Dkr. It provides, that you defray all expenses privately - meaning that you cannot claim car allowance and deduct petrol as an operating cost at the same time.

In principle, you are allowed to make a mileage estimate. To a newly started entrepreneur who may do many km without direct sales (e.g. canvassing), it may be hard to verify the commercial mileage without registration of the individual visits.

Alternatively to the mileage log, you can assess the total car costs and make a commercial/non-commercial ratio. Experience has shown, that this method is only useful for large vehicles or cars that for other reasons are costly to run. For ordinary standard cars mileage logs are fully sufficient.

Phone and computer

If multimedia is part of your profession and are available for your private use, it triggers multimedia taxation.
This means that you are taxed jointly for free phone, computer and internet connection. You are taxed on app. 2.600 kr. per. year, whether you are provided with one, two or all three of multimedia machines for private use.

Clothing

Usually, clothing is regarded as a private expense.
A lot of requirements must be met in order for the tax authorities to approve clothing expenses as operating costs. It provides that it must unmistakably be work wear which is not used for private purposes e.g. a doctor´s coat, a fisherman´s survival suit, or a blacksmith´s welding apron.

Ordinary "neat dresses" for work are not deductible as operating costs. In some instances, however, such clothes may be deductible if they feature a visible company logo - e.g. for use at fair attendances.

Rent

While extremely restrictive current practice apply for employees´ deductibility for work room at home, slightly less restrictive practice seem to apply for independent business owners´ homebased businesses. The reason is that while an employee´s work room is a supplement to a work place at the employer´s premises, an independent business owner´s work room is typically the only physical frames of his/her business.

Provided that there is a turnover in the company corresponding to a full time owner of the company, a minor part of a business owner´s home is usually approved for commercial use.

The upper limit for homebased business is 25% of the area, unless the real property assessment authorities have made a commercial and non-commercial property value split. This normally only applies to housing connected to industrial buildings and farmhouses in connection with agricultural property.

The tax benefit of homebased business varies depending on your housing situation.

If you lease a house or a flat, part of the rent, incl. power and heating, is deductible as operating costs. Freehold dwelling does not carry an actual rent. Instead, you service various debts. However, the tax value of a deduction does not change relative to commercial use of your property. You are limited to a deduction of part of the private power and heating expenses and a pro rata reduction of the taxable value of the property.

Travelling

Obviously, travelling expenses are operating costs provided that they are related to the company´s activities and does not imply private expenses. Whether you travel by train, plane or car is of no interest to the tax authorities. This also goes for diets.

2. Depreciation

On purchasing vehicles, large machinery or real estate for your business, such expenses are not fully deductible as operating costs at once, but are subject to partial deduction over a number years. This is called depreciation of an expense.

A number of complex rules apply to this. Below is a listing of the most important.

Operating equipment

If the acquisition expense of operating equipment (machinery - e.g. a computer) amounts to less than 12,300 Dkr. per itemĀ  the total purchase price is fully deductible in the year of acquisition. If the expense exceeds this limit you are only allowed to deduct 25% of the expense in the year of acquisition, 25% of the remaining expense the next year, etc.

The rule has a precarious amendment to it: "operating equipment designed for use in connection with other equipment is treated as one unit". Presumably, this means that a printer connected to a computer in terms of tax deductibility is treated as part of the computer. A precise interpretation of this rule must in practice be left to the authorities. Not even experts are able to come up with a precise and clear definition of this.

Buildings

Depreciation of buildings is another story. In some cases (typically shops and production plants) buildings are depreciable by an annual 5% of the acquisition price, while office and housing properties are not subject to depreciation. I.e. if you purchase an office building, normally this does not constitute a tax relief except for the mortgage interest deduction.

3. Non-deductible expenses

As mentioned in the introduction, certain types of expense which are undoubtedly business related, are not deductible. Some examples:

Borrowing costs

The costs of borrowing from a bank or mortgage credit institution. Irrespective of the fact that the loan is entirely for business purposes, such costs are non-deductible in the tax accounts.

Start-up expenses

Some expenses, characterisable as "start-up expenses", as opposed to "operating costs", may cause problems when preparing the tax accounts. There is a distinction between, on the one hand, business start-up expenses (non-deductible) and, on the other hand, costs of extention of an existing business (deductible). It is certainly not easy, because then again, some types of start-up expenses, such as lawyer and accountant, are deductible.

Entertainment

This term covers gifts to customers, business dinners with customers, etc. However, the term does not include expenses relating to staff care (e.g. office parties) or if you dine at a restaurant on a business trip.

If an expense falls under entertainment, 25% of such expenses is deductible in the tax accounts.

Staff training expenses

Expenses of maintenance of existing training and education are deductible, while expenses of retraining courses are not. Occasionally, doubt arises whether a course has a sufficiently obvious relation to the business. Thus, such expenses often give rise to tax accounts problems

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