A company's expenses reduce its profit and the tax base on which tax is calculated. A company's expenses may include anything related to generating or maintaining taxable income.

We often encounter situations where a client wants to add, for example, gardening services to their business activities because they want to buy a lawn mower, believing they will be able to claim it as a business expense. Since the lawn mower does not generate taxable income, it cannot be recognized as a tax-deductible expense. Even if the managing director were to use it, it could be considered non-monetary income for the managing director, on which social security contributions and taxes are due.

What are the most common expenses claimed by limited liability companies (s.r.o.)?

Cars in Business

Probably the most common way to reduce the tax base in a limited liability company (s.r.o.) is through a motor vehicle. From an expense perspective, a vehicle can be treated as an asset, in which case the expense consists of the vehicle’s depreciation (¼ of the purchase price per year) plus the actual fuel consumed. The second option is to use a private vehicle for business purposes, in which case the expense is travel expenses as defined by the Travel Expense Reimbursement Act. This is calculated as the sum of the coefficient 0.193 and fuel consumption (fuel price * average fuel consumption from the vehicle registration certificate), multiplied by the verifiable number of kilometers driven.

To quickly determine which option is more cost-effective for you, compare the vehicle’s market value in euros (e.g., €20,000) with the number of kilometers driven annually for business purposes (e.g., 10,000 km). If the value in euros is higher, it’s more cost-effective to purchase a company car; if the mileage is higher, it’s more cost-effective to use your personal car for business purposes. Of course, this is only a rough guide. If VAT calculations are also a factor in your decision, the results may vary slightly.

Rent

If you have an office, rent is considered an expense. However, you can claim up to €500 per year as an expense if, for example, your registered office is located in a property you own. For an individual, rental income up to €500 is tax-exempt, meaning it does not need to be reported on your tax return at all. If the property where the business is located is owned by a married couple, you can claim two exemptions of €500 each. The condition is that the landlords must be registered with the local registry office and have been assigned a tax identification number (DIČ).

Phone, computer, office supplies

Typical business expenses include electronics and office supplies. These amounts are almost always under €1,700, which means that, from an accounting perspective, they are classified as consumables or minor tangible assets that are not depreciated and are expensed in full. If you use a cell phone, the internet, or other services, you must transfer the service contracts with your provider from your personal name to the company’s name.

Entertainment Expenses

Lunches, coffee, and other hospitality expenses with business partners. Coffee, tea, and bottled water at the workplace. These are all entertainment expenses that, while recorded in the company’s books, are not tax-deductible (explained below). Entertainment expenses also include various promotional items, vehicle wraps, and similar items. Special categories include promotional items costing up to €17, which are tax-deductible. Additionally, wine may be tax-deductible up to a maximum of 5% of the tax base.

Personal Consumption Goods

There is a special category of expenses that can also be used for personal purposes (motor vehicles, computers, phones, televisions, sofas, furniture, and others). The Income Tax Act allows you to claim 80% of such expenses as tax-deductible costs if you can prove that they were used at least once for business purposes. If you wish to claim 100%, you must be able to prove during an audit that the items were indeed used exclusively for business purposes, just as with standard business expenses. From a value-added tax (VAT) perspective, however, the situation is different; there, the actual use for business purposes is always examined. It may therefore happen that, from an income tax perspective, 80% is considered a business expense, but you claim only 50% on your tax return because you use the item in question 50% of the time for personal purposes.

Taxable vs. Non-Taxable Expenses

Not every expense is tax-deductible. You can record it in your accounting records, but the Income Tax Act does not recognize it for tax purposes. An example would be entertainment expenses, which are recorded in the accounting records and reduce the tax base before adjustments but, when preparing the tax return, generally increase the tax base through add-back items. Non-tax-deductible expenses also include, for example, fines, personal consumption expenses, and fuel costs not recognized as tax-deductible expenses (20% of fuel costs if no logbook is kept, or excess consumption). A special category of tax-deductible expenses consists of costs that are deductible only after payment. These include, for example, rent, legal and accounting services, and marketing studies. These expenses become tax-deductible only in the year they are actually paid.

Liability and Risks

In the event of a tax audit and the disallowance of expenses, there are two possible approaches. If the tax authority disagrees with the taxpayer’s claim and disallows a particular expense, the taxpayer must pay the additional tax, as well as a fine and late payment penalties. However, if the tax authority determines that there was a deliberate and clear violation of the law, or tax evasion, the managing director faces criminal prosecution.