This paper is to clarify the frequently asked question: “What expenses can I deduct for my business?”. Often there is a bit of confusion on certain items like professional expenses at home, the car, the mobile phone, travel, meals and clothes. This paper will clarify all of them.
Tax deductible expenses for freelancers are like the ones for corporations, although there are some differences to be considered that we will highlight in a separate chapter. Freelancers in the “Estimación Objetiva” or “Modulos” system are not concerned, as their taxes are fixed and are not calculated based on income and expenses.
2. REQUIREMENTS FOR AN EXPENSE TO BE DEDUCTIBLE
The criteria set by the tax office (Hacienda) for assuming that an economic expense can be considered as deductible are:
- It must be related to the economic activity and should contribute to the result
- It must be documented with the corresponding legal invoices
- It must be registered in the bookkeeping as an expense or an investment
Of these three criteria, the most important one is the first one, as it must be demonstrated that expenses correspond to your professional activity and are not private. It is useful to make notes explaining the detail of each invoice so that in the case of having an inspection you can defend yourself adequately. Do not include unjustifiable or undocumented expenses because if you get inspected you will not be able to defend yourself and you will be exposed to increased scrutiny.
As for the second requirement, it is the one inspiring the healthy habit of asking for an invoice for everything. Undocumented expenses will not be accepted, and the only documentation accepted is an invoice. Even if you have invoices, make sure that the description of the expenses in the invoice clearly links them to your activity and make sure all the needed elements are on the invoice (Name, address and tax number of both vendor and buyer, the title “Invoice” or “Factura”, invoice number, date, base amount and applied VAT and retentions both in percentage and amount. Pro Forma invoices, Packing Bills, Shipping Documents etc. are not accepted.
Tickets or simplified invoices are generally not deductible, as they do not allow identification of the buyer. So even if it is a bit cumbersome, get used to asking for an invoice at restaurants, gas stations, taxis or supermarkets (if what you are buying is business related, of course). If there is really no way to get an invoice, at least make sure that the expense is paid with an account or card that is registered on the name of the company or on your own name if you are a freelance professional. Cash payments are questioned and to be avoided.
3. RELATION OF DEDUCTIBLE EXPENSES IN IRPF
These are the most common business expenses accepted by the Spanish Tax Agency as valid deductible expenses:
Office or Warehouse Space: If you own or rent specific space for your business, you must register these to be able to deduct the related expenses. You may deduct all the expenses associated with each location: Rent, renovation, maintenance, electricity, water, telephone, expenses associated with the mortgage or insurance etc. You can also amortize the investment made if you had bought it.
Operational Expenses: Purchase of merchandise, raw and auxiliary materials, fuels, components and assemblies, containers, packaging and office supplies. The consumption over the year is calculated according to the formula Consumption = Initial stock + Purchases - Final Stock.
Wages and Salaries: Payments to employees in terms of salaries, extraordinary payments, fees y allowances for travel expenses, compensation in kind, premiums (bonuses) and other compensations.
Social Security Payments: 100% of social security payments for Freelancers in the Special Regime for Autonomous Workers (RETA) and the company part of social security payments for employees in the General Regime. The social security payments in RETA by shareholders or administrators of companies is not deductible and must be payed by the person in question privately.
Other Personnel Expenses: This includes training expenses, compensation for termination of contract, personal accident insurance, small gifts (Christmas gifts etc.) and contributions to pension plans or corporate Social Prevention Plans.
Leases and Royalties: Includes rent, royalties, SaaS, technical assistance, leasing instalments that do not involve land, plots, or other non-depreciable assets.
Reparations and Conservation: Maintenance expenses, spare parts and adaptation of material goods. Those that involve an extension or improvement are not included, since they are considered as depreciable investments over several years.
Services of Independent Professionals: Fees of economists, lawyers, accountants, notaries, as well as the commissions of commercial agents or independent mediators.
Other External Services: Expenses for research and development, transportation, insurance premiums, banking services, advertising, public relations, electricity, water and telephone supplies and other office expenses not included in the previous concepts.
Deductible Taxes: The real estate tax (IBI), the economic activity tax (IAE) and other state and non-state taxes, surcharges and contributions are deductible. Company Tax and Personal Income Tax are not deductible nor is the balance of VAT paid. Fines and fees for enforcement or for submitting the tax declaration after the deadline are not deductible.
Value Added Tax: Received VAT can be compensated by paid VAT except if the activity has no right to deduct VAT as happens with activities that are exempt from charging VAT (e.g. medicine) and with activities covered by some special regime (special regime of equivalence and special regime of agriculture, livestock and fishing).
Financial Expenses: Interest on loans and credits, discounted bills of exchange, surcharges for deferral of debt payments, interest on late payments to the Tax Agency. Expenses derived from the use of own capital are not be included.
Amortization: Depreciation of investments considered as tangible or intangible fixed assets for the activity. Depreciation can be linear or not and accelerated amortization is available for businesses with a reduced dimension.
Losses due to Deterioration of Credits: Bad debts (only if they are not covered by guarantees, insurance, etc.), deterioration of editorial, phonographic and audio visual rights and other intangible assets, with a maximum of 20% of acquisition value.
Other Deductible Expenses: Acquisition of books, subscription to professional magazines, expenses to attend events related to the professional activity (courses, congresses, conferences), fees from business associations, corporations and chambers, as well as health insurance premiums paid by the self-employed persons for themselves, their spouse or children under 25 who live in the family home, with a maximum of 500 euros per person.
4. FREELANCE “SPECIAL DEDUCTIONS”
In the case of freelance professionals, there are several peculiar items that tend to generate doubts, mainly because of the unclear degree of "impact on the activity" of these expenses. The Tax Agency has been increasingly demanding in terms of the requirements to justify this aspect. To address this issue, freelancers can deduct an annual amount of 5% of net income with a maximum of €2.000 for unpaid invoices and expenses that are difficult to justify. Still, there are several items worth clarifying:
Home Office: In this case, you can deduct 30% of utilities, but only the part that is proportional to the square meters dedicated to your economic activity as declared in the census of the Tax Office. If you want to deduct rent, you must get two separate invoices, since the rental of the professional part must include VAT. If you own your house, you can deduct the proportional part of insurance, IBI and community costs.
Mobile Phone: Hacienda will allow you the deduction if you have two different telephone lines, one for personal use and one for professional use. Only then you can justify that the expense is related to the business activity and avoid surprises when inspected.
Car and Associated Expenses: These expenses are only admitted for businesses dedicated to transporting passengers and goods or visiting clients like driving instructors, taxi drivers, transporters, delivery men, carriers, sales agents and representatives. The rest of freelance activities cannot deduct these expenses for personal income tax and only up to 50% in the case of VAT. Leasing expenses are subject to the same limitations in relation to the deduction of fees and VAT.
Travel and Representation Expenses: You can deduct both travel expenses by public transport (plane and train, but also taxis) as well as those of stay in hotels and expenses for meals. The professional character of these expenses must always be proven, so daily, weekend or holiday expenses are unlikely to get accepted by the Tax Agency. Meals is one of the most controversial items, so it is convenient to limit it to the logic of your activity and write down who you had the meal with.
Subsistence Allowances: Freelancers may deduct €26,67 per day (€48,00 abroad) when not staying overnight and €53,34 per day when staying overnight in Spain and €91,35 abroad. Expenses must be due to the development the economic activity, paid electronically and for which the corresponding invoice is available. This deduction is not admitted as an allowance if the expense has been made in the municipality where the self-employed person develops his professional activity.
Clothing Expenses: Only expenses for professional clothing such as protective clothing, uniforms, or other items of clothing with the company logo are allowed. In the case of artists there is a more flexible interpretation.
5. DEDUCTIBLE EXPENSES WITHOUT INVOICE
There is a series of costs that do not require an invoice to deduct them as expenses:
- Insurance policies
- Salaries and social security payments
- Bank charges
- Expenses of commercial contracts
- Municipal taxes and fees (IBI, garbage fee, license fees)
6. FISCALLY NON-DEDUCTIBLE EXPENSES
The following expense items are never considered as deductible expenses:
- Fines and penalties
- Gambling losses
- Expenses made In tax havens.
- VAT already deducted in a VAT declaration