The moment you walk out of the Chambers of Commerce having registered your one man company, you are an entrepreneur for income tax purposes. Some tax credits can be achieved, one of them is the entrepreneurs discount for 1225 hours worked.
Entrepreneurs discount for 1225 hours worked
If you spend during a calendar year at least 1225 hours on your company and the profit made is your main source of income, then you can claim a EUR 7.030 (2020) entrepreneurs discount. And if you are a starting entrepreneur, you can deduct an additional EUR 2.123 if you meet the 1225 hours worked in the first place.
How to calculate the hours?
The worked hours are obviously the time you charge your client with for the job performed. However, sometimes you make more hours than you actually can charge the client. Especially in the startup period you have to the best to your ability explore options to get the client in. You visit meet and greets, you create a logo, a vision, the website needs input etc.
All the time spend on these aspects are part of the 1225 hours. Success is not a condition to claim the entrepreneurs discount for 1225 hours worked, but if you make no profit, the credit is less interesting.
Entrepreneurs discount for 1225 hours worked – court case
An entrepreneur filed his 2016 income tax return in which he made EUR 3.000 turnover and EUR 9.000 costs. So he already made a loss and on top of that he claimed the entrepreneurs discount.
The tax office denied the entrepreneurs discount as it was very unlikely for the tax inspector to spend 1225 hours on EUR 3.000 turnover. The tax inspector had of course asked for the explanation of the hours spend on the company and this tax payer came up with not 1225 hours, but with 2257 hours spend on the EUR 3.000 turnover. The overview was clearly made only after the inspector asked for it and the overview made it unlikely to be relevant for the deduction. It was more a total of assumed time spend then actual time spend.
The court agreed with the tax office and the entrepreneurs discount was denied.
You might think, big deal, he had not made a profit anyway, so what tax consequences can it have? Well, he made indeed a EUR 6.000 loss and was compensated for EUR 7.280 (2016) entrepreneurs discount, totally a EUR 13.280. That is set of against the income of a previous year and if in the previous year he was still employed with a high salary, then 52% of the EUR 13.280 was paid out to him for the 2016 tax return, being EUR 6.905, which he now needs to pay back.
Entrepreneurs discount for 1225 hours worked – how to go about that?
If you have a running business doing well and your turnover can easily explain the hours spend, this article is not relevant for you. But if you just started, the tax office sometimes demand from you to explain the hours spend on the company, if you claimed the entrepreneurs discount in the income tax return.
If you are super organized, keep track of the hours spend. If you are a normal human being that simply ticked the box in the income tax return for the extra deduction, make an effort on the list. Clearly the tax inspector does not accept a list made after it was asked for. So if you make the list after it was asked for, make it look like you did it while working. By the way, why is making the list later causing a rejection? Very strange philosophy of the tax office.
Have the list match with your agenda, the court case made clear that was important. Make clear to this civil servant who has never in his career needed to look for work himself, that an entrepreneur needs to create his or her income by being creative and creativity involves useless time spend. That is also business time.
Tax is exciting
We think that filing an entrepreneurs income tax return is exciting and if the entrepreneur is able to use the maximum of the offered tax credits, both the client and us are very happy and the chance exists our client also become slightly excited about tax. If you are an entrepreneur and you need help filing your tax return, do not hesitate to contact us.