06 Mar What is a deductible expense and how to compliantly process them following Vietnamese Accounting Standards (VAS) to avoid deduction disallowance?
As a business owner, one of your primary concerns is managing expenses and maximizing profits. One way to reduce your tax liability and keep more of your hard-earned money is to take advantage of deductible expenses.
As a company, it is important to understand what deductible expenses are and how they can help reduce your tax liability and maximizing profits. Deductible expenses are expenses that can be subtracted from your company’s revenue, ultimately reducing the amount of taxable income (profit). It is important to note that not all expenses are deductible, and there are specific criteria that must be met in order for an expense to be considered deductible. In this article, we will explore what deductible expenses are and the most common types for businesses.
What are Deductible Expenses?
Deductible expenses are business expenses that can be subtracted from a company’s income before taxes are calculated. These expenses help to reduce the taxable income of the company, which in turn lowers the amount of tax it has to pay.
The most common deductible expenses for businesses include:
- Salaries and Wages
The salaries and wages paid to employees (or freelancers), including payroll taxes and benefits are deductible expenses. This includes regular pay, bonuses, overtime pay, and commissions.
- Rent
The rent paid for business property is also a deductible expense. This includes rent paid for office space, warehouse space, and other business-related locations.
- Office Supplies
Office supplies, such as paper, pens, and printer ink, are also deductible expenses. These expenses can add up quickly, so it is important to keep accurate records.
- Business Travel Expenses
If you travel for business purposes, you can deduct expenses such as airfare, lodging, meals, and transportation.
- Advertising and Marketing Expenses
Advertising and marketing expenses are also fully deductible. This includes expenses for advertising campaigns, public relations, and other marketing efforts.
- Insurance
The premiums paid for business insurance, such as liability insurance and property insurance, are deductible expenses.
- Depreciation
Depreciation is the decrease in value of an asset over time. The cost of the asset can be deducted over the useful life of the asset.
- Interest
The interest paid on business loans is a deductible expense. This includes interest on credit cards, lines of credit, and other types of loans.
- Legal and Professional Fees
Fees paid to lawyers, accountants, and other professionals are also deductible expenses.
- Taxes
Finally, taxes paid by the business, including property tax and sales tax, are also deductible expenses.
It is important to note that not all expenses are deductible. Personal expenses, fines and penalties, and political contributions are not deductible or is only in certain specific cases and under specific terms. In addition, some expenses may be subject to certain limitations or exclusions. When an expense is considered nondeductible, its amount will be not be deducted from the income for CIT calculation. Which means that even though the company cash has been used to buy the service or the item, you will still need to pay the CIT on that “amount” as the expense is not considered as being directly related to the business and its operations. The same treatment applies for VAT i.e. the VAT amount on the expense will not be claimable.
It is important to note that in order for an expense to be deductible, it must be both ordinary and necessary for the business. This means that the expense must be commonly incurred in the type of business being conducted, and it must be necessary for the business to operate.
Additionally, it is important to keep detailed records of all deductible expenses, including invoices and receipts. In some cases, there may be specific documentation required in order to support the deduction. For example, regarding flight ticket for a company trip, to support the deduction mainly:
Case 1 / The company purchases the ticket directly
a/ boarding passes
b/ a valid VAT invoices from the travel agency or airlines
c/ bank transfer proof if the amount is over 20.000.000 VND
d/ an economical and reasonable reality and justification for the trip (business meetings, prospection, etc.)
e/ a valid labor contract with the company at the time of the trip
f/ a proper staff policy registered stating that these types of fees are paid and borne by the company
g/ a company decision to send the staff for that trip/mission
Case 2/ The Employee purchases the tickets and will claim it back from the company
a/ boarding passes
b/ an invoices from the online travel agency or airlines
c/ bank or credit card statements showing the debit
d/ an economical and reasonable reality and justification for the trip (business meetings, prospection, etc.)
e/ a valid labor contract with the company at the time of the trip
f/ a proper staff policy registered stating that these types of fees are paid and borne by the company. If the Employee makes the payment in advance, it has to be stipulated in the policy that the transfer is made by the employee’s personal card and the Company guarantees a refund to such an advance.
g/ a company decision to send the staff for that trip/mission
Please note that other expenses during the trip, such as: hotel, entertainment, restaurant, transportation, etc. must be stipulated in the company’s financial regulation. It is to ensure these expenses will be deductible when calculating CIT and set a proper limit for each managerial level to avoid incidents (such as overspending).
In Vietnam, there are specific rules and regulations surrounding deductible expenses, and it is important to ensure that you are in compliance with these regulations in order to avoid penalties and fines. Specifically, the Vietnamese tax authorities require that companies maintain a specific list of supporting documents for each expense incurred, including invoices, receipts, and other relevant documentation. Failure to maintain these documents can result in expenses being disallowed as deductions, even if they are otherwise deductible.
To ensure compliance with Vietnamese tax regulations and to maximize your deductible expenses, it is important to work with experienced professionals who can assist with tax compliance procedures. PCA Company Services and PCA Tax Accountants can provide guidance and support to ensure that your company is in compliance with all regulations and that you are maximizing your deductions.
Contact PCA Company Services today. We will help you info@pcacompanyservices.com
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