Depreciation versus costs, there is a difference between them. No clear to everybody.
Depreciation versus costs
Entrepreneurs spend money on office equipment just before the end of the year, to avoid a high profit tax. Despite spending a substantial amount of money, the investment did not really reduce the taxable profit. What happened?
What is a company cost?
A company costs is an expenditure made for the company. That can be anything from rent to paper for the printer. From the table and desks to the garbage bin. The entrepreneur sees all these payments as costs. But are they?
In the Netherlands we agreed that the payment of the items mentioned above, exceeding EUR 450 ex VAT, are regarded investments. Amounts below EUR 450 are deducted from the profit instantly. Amounts exceeding the EUR 450 are regarded investments.
What is an investment?
An investment is an office expenditure being a material item, that costs an amount exceeding EUR 450 excluding VAT. This is an investment and that investment you need to depreciate over a 5 year period.
You purchased an office desk for EUR 1.000, this is depreciated over a 5 years period.
A laptop is purchased by you of EUR 1.000, this is depreciated over a 5 year period, even when the life span of a laptop is shorter.
You paid for software, indeed, not a material item. Neither did you purchase the ownership of the software, you paid for the usage, the license. Full amount is a deductible cost.
Year end is coming – make costs! – silly?
Indeed silly, then again, a very common response. Why silly? The costs are made to avoid taxation. That implies the costs are not made for the necessity of the business. The taxation is 15% in a BV company and max 49,5% in a one man company.
Making costs implies you spend 100% of an amount to avoid 15% or 49,5% tax. That is silly.
Example. You do not need the new printer, but as you do not want to pay too much tax, you pay the EUR 450 printer. This you do, so the profit is EUR 450 less, that saves you 15% (EUR 67,50 less tax) or 49,5% (EUR 222,75 less tax). From your bank account left EUR 450 to pay for that printer to avoid paying EUR 67,50 or EUR 222,75 tax. That does not make sense.
Costs you make for the business.
Year end is coming – make more profit!
Indeed you pay more tax if you make more profit. If you make more profit, your company is doing well. If your company is doing well, it is maybe easier to secure a loan for the company. For instance an employee would like to have a company car, for which you would like to take out a financial or operation lease contract. Which is basically a fancy loan.
If you make more profit you do pay more tax, but you have also more to spend after the tax has been paid. We are in favour of more profit.
Tax is exciting
We think tax is exciting. You making a good profit is exciting as well. We understand the cost part. While doing the books we help you as good as we can to have all costs, that are in fact business costs, reported. If that is done, then the profit is a given and the tax a result.