If you manage business expenses daily, you’ve likely encountered receipts or invoices that could raise red flags with tax authorities. Classifying certain expenses, such as commuting or gifts, as deductible can lead to tax audits, penalties, and compliance risks. These are known as non-deductible expenses, and finance teams must stay aware of them to avoid fraud risks and misreporting.
For finance professionals, expense management can feel like an overwhelming task — sorting through endless piles of invoices, receipts, and transactions. A structured approach can help, as expenses generally fall into three categories: deductible, partially deductible, and non-deductible. While most business-related expenses qualify for deductions, such as business travel and office supplies, others are entirely or partially non-deductible, depending on local tax laws.
Understanding these categories’ distinctions is crucial for CFOs and finance teams to ensure tax compliance and optimise financial planning.
Understanding non-deductible expenses
Non-deductible expenses refer to costs tax authorities do not allow businesses to deduct from taxable income. Ultimately, it all comes down to local regulations. For instance, client gifts in Germany are deductible up to 35€, but in Belgium, the amount is up to 50€.
Regardless of specific rules that vary across jurisdictions, some expenses are typically considered to be non-deductible, such as personal expenses — even when incurred during business hours.
Common types of non-deductible expenses
Personal expenses
All expenses that are not directly related to the business cannot be considered deductible. Costs such as using a car outside of business hours or a personal cell phone cannot be deducted.
The same applies to other expenses, such as rent. Even if an employee works from home, rent is considered a non-deductible expense.
Commuting costs
If an employee chooses to use a personal vehicle for their commute to and from the office instead of public transportation, those costs are not deductible.
However, if they need to use their car for a trip to attend a meeting or other work-related obligations during business hours, the mileage expense can be deducted.
Fines & penalties
All costs related to illegal activities such as gambling are not deductible, even those incurred during business hours and for client entertainment.
The same applies to all legal fines or penalties imposed by authorities, such as parking tickets.
Political contributions
Employees might feel passionate about certain causes, like sustainability, and some companies even encourage donations. However, all political contributions are considered non-deductible.
This also applies to lobbying efforts and charitable contributions.
Gifts over allowable limits
Many jurisdictions set caps on the amount deducted for business gifts. This means companies can spend as much as they want on gifts, but only a certain amount can be deducted.
Companies should reach out to local entities to understand the established limit.
Why proof-of-expense matters
Imagine a situation where an employee submits an expense claim for a €50 dinner, without any supporting details. Naturally, finance controllers and managers would question: why did this expense happen? This amount cannot be reimbursed or deducted without proper documentation, potentially leading to compliance risks.
Non-deductible expenses directly impact finance operations, including:
- Financial forecasting: misclassifying expenses can lead to inaccurate budget planning;
- Audit risks: incorrectly deducting non-deductible expenses increases the likelihood of tax audits and penalties;
- Cash flow management: non-deductible expenses increase after-tax costs, requiring stricter spending oversight.
To prevent these risks, employees must provide proof of expense, typically through receipts and invoices. These documents clarify critical details, such as date, attendees, and business purpose, ensuring compliance. In some cases, employees may need to submit additional justifications to link the expense to company operations. Without such records, finance teams cannot substantiate deductions during an audit.
Keeping track of these records can be challenging, especially for companies relying on manual bookkeeping methods. Implementing AI-powered expense management software like Rydoo simplifies the process by automating documentation and categorisation. Employees can scan receipts, add required details, and submit expenses instantly, ensuring compliance with the company policy.
For managers and controllers, automation allows for rule-based approvals and policy enforcement. If an expense is flagged as non-deductible, employees receive real-time alerts and can either correct or justify the claim. This streamlines the expense management process and reduces the risk of non-compliance.
Avoiding non-deductible expenses is crucial to ensure compliance and financial control over your business. Leveraging AI-powered automation allows finance teams to improve oversight, minimise errors, and reduce risks associated with improper deductions.
Digital expense management solutions like Rydoo can help simplify this process by making record-keeping easier and streamlining the entire process. If you want to avoid unnecessary risks and costs, reach out to Rydoo’s team to book a demo and discover how to avoid non-deductible expenses.