Everyone has read or heard it: ‘Make sure you bring in your expenses to reduce your taxable income’. You may be questioning, ‘Do I have to incur additional expenses to get these tax benefits?’. The short answer is ‘no’.
In this article, we explain step by step why it is not useful to incur extra expenses for your business.
Why do you bring in expenses to your sole proprietors?
Let’s start with the basics. Why would you raise costs in your sole proprietor in the first place? Simple, it’s a way to reduce your taxable income.
✅ When you bring in business expenses, such as buying a new laptop or an online course, these expenses reduce your taxable income. Sounds good, right?
Tip from an accountant
Some costs you can deduct at 100%, other costs you may not deduct at 100%. View the list of deductible professional expenses for your accounts here .
What happens accounting-wise when you incur expenses
Accounting-wise, all expenses are deducted from your income, the difference between the two constitutes your profit, or taxable profit. Say you earned €1000 and spent €100 on business expenses, taxable income becomes €900.
Putting in expenses is important because it helps you pay less taxes. This is because you will be taxed on €900 in the example instead of €1000.
Why you would incur extra expenses
You might think: ‘If I incur more expenses, I pay less tax, right?’. It seems like a logical thought. In theory, incurring extra expenses would reduce your taxable income and give you a tax advantage. But let’s turn that thought around and view it practically. Would you really want to spend money on things you don’t really need, just to get some tax benefit?
The reality of incurring extra costs
Here’s the real truth: making unnecessary extra expenses is not a winning strategy. Imagine spending €100 on something you don’t need. Yes, you can save some taxes but remember: you still spent €100!
With sole proprietors, your profits are taxed by personal income tax. For simplicity, we calculate that you are in the 50% personal income tax bracket. That means that for every €100 you spend, you will have to pay €50 less in taxes. But you’ll still have €100 less profit.
When you make a business purchase for €100, you do indeed have a tax benefit of about €50, but remember that you still have to pay the €100. It’s not ‘free money’. The tax benefit is nice, but it should not be the main reason for making a purchase.
Tip from an accountant
What is useful is realising that some costs you incur anyway are business expenses. Above all, don’t forget to include these in your accounts.
Smart expenses are the key to success 🔑
Choose expenses that will really move your company forward. Invest in things that will increase efficiency, productivity and profitability from your business. This approach not only helps you save money, but also ensures that every euro you spend is invested in growing your company. This way, your investments can ultimately lead to more profit.
