As a self-employed person you will have to deal with all kinds of important issues that can ensure that you can get the most out of your company. Representation costs can be an important and interesting part of your own business, when you know whether this is an attractive option for you and your company. There are several options when it comes to representation costs. What are entertainment costs exactly? Are representation expenses tax deductible and can you deduct VAT? These costs can be very beneficial in the case of your own company, especially when there is a lot of customer contact.
What are representation expenses?
It will regularly happen that you as a self-employed person bring a future customer or client with you for something to eat or drink. This has a business character, there is no quid pro quo and it is therefore partially deductible. Other costs such as arranging a party, purchasing business clothing or buying a business gift also fall under representation costs. Representation costs are mixed costs that are both business and private: you can therefore deduct these costs from the tax. However, there are limits to this.
Representation costs: a gray area
There is no direct consideration linked to entertainment costs, which means that in the view of the tax authorities they cannot be directly regarded as business costs. Also, the exact meaning of the word 'representation' is not fixed and can therefore be understood in several ways. For that reason, the Tax and Customs Administration is reasonably flexible when it comes to deducting these costs. However, the Tax and Customs Administration has opted to make representation expenses partially deductible. You will have to deal with the so-called 'threshold'.
What are the benefits for you as a self-employed person?
As a self-employed person it can be very attractive to make use of representation costs. This way you can deduct all kinds of things that are used for your company from the tax. You can think of all kinds of things that you can use to grow both business and private. And in this way you will benefit from certain expenses, both for business and for private purposes. By making use of these representation expenses you can have a part deducted from the tax authorities in order to save money on such expenses.
Examples of representation expenses
What are clear examples of entertainment costs? One of the advantages of these costs is that they can be used for both business and private purposes. One of the examples of an expense that you can partially deduct from the tax authorities afterwards is a dinner or business lunch with a (potential) customer or principal. But you also have the option to deduct this when it comes to a subscription to a business magazine. You use this magazine in your spare time, but you reap the benefits of it business.
Organizational costs and contributions to corporate events
There are many more costs that can be characterized as representation costs, including organizing receptions, drinks and conferences. Other organizational costs can also be seen as representation costs and can thus be deducted from the tax authorities. In addition, contributions to such events are also part of these costs and you have the option to request a partial refund. It is therefore important to keep a good record of these costs or to have them kept up to date by an accountant, so that this can be easily calculated afterwards.
The main rule of entertainment expenses
When calculating the representation costs, you may encounter a somewhat gray area. In any case, one main rule is clear: the 100% business costs are deductible. The Tax and Customs Administration has compiled a list of costs that can indisputably be regarded as businesslike. This includes costs such as marketing of the company, courses, professional literature and more. There are also things that you use for both business and private purposes, also known as mixed costs.
Apply for a business account
To make a clear distinction for yourself between business and private life, the choice for a business account is interesting. In addition, it is also a lot easier for the accounting department to put things in order. There are several choices in terms of business accounts you here to see.
The mixed costs: both business and private
There are a number of points to consider when deducting representation expenses. For example, there is a fine line in the business and private area of the costs you incur. When the private part predominates, it is possible that these costs may not be deducted. Examples of these so-called mixed costs are:
|Company car||A car can also be frequently used for private use|
|Stimulants (cigarettes / cigars)||This is also used privately in most cases|
|Telephone charges||A telephone can be used for business, but at the same time it can also be used privately in all kinds of ways.|
|Rental costs of a building or maintenance costs of a building||When a property is mainly used for business, these costs may be deducted|
|Workwear||Work clothing is really work clothing when it is worn exclusively for the company|
The non-deductible costs
There are also a number of things that have been determined by the government to be non-deductible. Costs such as health insurance, obtaining a driver's license, a traffic fine and a visit to a beauty salon are not included in the representation costs. Clothing must also be really work-related (think of logos or special uniforms) and if this is not the case, it cannot be deducted. These are clear costs that do not fall under these costs and you must therefore pay for them yourself.
The gray area for entertainment costs
There is also a gray area when it comes to entertainment costs. Not all things you can purchase are listed in the list of the tax authorities. As a result, there are certain things of which it is not clear whether or not it is allowed. The moment you enter the gray area, there is a key question that applies: is it commercially defensible? In other words: can you register certain products in the name of the business? These are important points when it comes to deducting entertainment expenses.
Points for attention: the threshold
In addition, the so-called threshold created by the tax authorities must also be taken into account. What is the threshold exactly? Every year, the Tax and Customs Administration has set a different threshold with an amount that, as it were, forms the limit for the representation costs. Anything above the threshold may be deducted. Because most self-employed persons do not obtain such amounts, the representation costs can also be calculated in a different way, without a threshold. In this case, you deduct 80% of the costs and do not exceed the threshold. A fixed amount applies to travel and accommodation costs: you may not deduct more than $ 1500 for this.
What are the rules in 2019?
It is possible that the amount of the threshold is changed. In 2018 and a few years before, this amount was $ 4,500. In 2019 this was adjusted slightly and increased to $ 4,600. If you, as a self-employed person, spend more than $ 4,600 on business costs, such as contributions to events, a visit to a drink or the organization of a party or conference, you may deduct anything in excess of this amount from the tax authorities. The threshold is very high and most self-employed workers will therefore not reach this amount. You can calculate the amount with a threshold as well as without a threshold.
|2017 - 2018||$ 4500|
|2015 - 2016||$ 4500|
|2012 - 2014||$ 4400|
Calculate the representation costs with a threshold ( calculation example )
How can you calculate for yourself the amount that you can deduct? The amount can be calculated as follows if you have exceeded the threshold with the costs. An example: in 2019 you spent $ 2500 on travel and accommodation expenses, $ 3000 on organizing an event and $ 1500 on business lunches and / or dinners. This comes to a total amount of $ 7,000. Travel and accommodation costs have a maximum of $ 1500. This means that the amount will go from $ 2500 to $ 1000. In this way, the total amount comes to $ 5500. By deducting the $ 4600 from this amount, you arrive at the costs that you may deduct. $ 5500 - $ 4600 is therefore $ 900.
Calculating representation costs without a threshold ( calculation example )
If you do not meet the threshold of $ 4600, and this will be the case for most self-employed persons, you can choose to calculate the representation costs without a threshold. As an entrepreneur, you may therefore deduct 80% of the costs in 2019 (this standard also applies in 2018) and pay 20% yourself. In this way you do not have to exceed the norm of $ 4600. An example: you incur the following costs in 2019: you spend $ 1,500 on lunches and dinners and you contribute $ 1,500 to a reception or other event. The total costs are then $ 3000. These costs may be deducted for 80% and this comes to an amount of $ 2400. For entertainment costs without a threshold, the same rules are applied regarding travel and accommodation costs.
Is VAT deductible for representation expenses?
In which cases can you deduct the VAT and in which cases not? What are points of attention you should pay attention to? It is not always the case that you may deduct the VAT when you go out for lunch or dinner with a future customer or principal. According to the tax authorities, you can deduct the costs if you get lunch in a supermarket for your business meeting and then eat it at work. When should the costs not be deducted according to the tax authorities? In the following two cases:
- When eating or drinking in a catering establishment
- When you have lunch or dinner provided by a caterer who hires you at a rented location.
The deduction of the VAT for representation expenses ( calculation example )
When you have lunch with a customer or possible client, you can use a catering facility. In this case, you can declare 80% of these costs with the income tax return. If this is an amount of $ 60, you can enter $ 48. When you choose to get lunch for the same amount from the supermarket, calculate it as follows. First you deduct a VAT percentage of 9% according to the current standard. From $ 60 this is $ 5.40. Then there remains an amount of $ 54.60. Of this amount, 80% may again be entered as representation expenses. This comes to a total amount of $ 43.70.
Points for attention when deducting VAT
Are you going for lunch at a restaurant with a customer or business partner? In that case, you cannot deduct VAT and you therefore pay 20% of the total amount yourself. With an amount of $ 80, you therefore pay $ 16 yourself and enter $ 64 in the income tax return. It is important to be able to prove that the lunch or dinner is of a business nature. You can easily do this by also mentioning the name of the customer when submitting the voucher and also mentioning that it concerns a business lunch appointment.
Help for accounting
If you are dealing with representation costs as a self-employed person, you can choose to call in help for this. In the first place, this help can help you explain difficult terms and other financial questions you may have. If you have any questions about invoicing with / without VAT, you can also contact your accountant.
Hire an accountant
An accountant keeps track of all income and expenditure and takes care of the VAT return, among other things. The accountant will also take on this task when it comes to representation costs. You can hire an accountant through a large company, but there are also numerous independent accountants who you can turn to for the accounting of your own company.
When are representation costs interesting for you?
The representation costs can therefore be very attractive, provided you are an entrepreneur who exceeds the threshold of $ 4,600. If this is not the case, you can also opt for the 80/20 scheme as a self-employed person. In this case you pay 20% of these business costs yourself and 80% you can declare in the income tax return. Because the tax authorities are reasonably flexible when it comes to deducting these costs, it can be very attractive from a business point of view to make use of the representation costs. Please note the clear boundaries between business and personal use.