Peter Varga in an interview for Forbes: Watches, holidays or luxury handbag: will these items stand up on tax returns?

Peter Varga was interviewed by FORBES on several practical tax topics. Can luxury watches, handbags or microwaves be considered tax expenses? Under what circumstances? Read or below.

What pearls people put in their expenses (you can multiple examples)

It is not rare in Slovakia when sole traders or owners of eseroces try to optimize taxes through personal items. It often happens that they include luxury watches, expensive handbags, clothes, microwaves or other household appliances, dentist treatments, cinema or theatre tickets, glasses or even a holiday – which they try to label as a business trip – in the costs associated with their business activities. It is important to note, however, that in defending these costs, the burden is primarily on the taxpayer and the tax authorities or the courts may not recognise these costs. In certain circumstances, this may also have criminal ramifications.

Which of the costs mentioned above were still okay? And which were no longer? And why?

This is always individual. Every entrepreneur may have some reason why they need a more expensive watch, clothes, handbag and so on to run their business. However, that reason must be legitimate enough. For assets of a personal consumption nature, their proximate causality to the generation of income is important. It must be remembered that the taxpayer bears the primary burden of proof in procedural terms. Given the unpredictability of the decision-makers, I recommend, at least for larger transactions, to have this assessed by experts in the field. When good faith is maintained, it is just such an assessment that protects against criminal liability. However, if a business avoids proving itself to the tax authorities, it can still take advantage of the 80%-20% expense claim for personal property,”

So what is the tax office focusing on when checking these items?

It is the aforementioned legitimacy and whether the acquisition of these items is necessary for the exercise of the profession, respectively. business activity. For example, the internal rules of the Slovak Bar Association require attorneys to take care of the dignity of their appearance. For women, this means wearing a skirt or trouser suit, blouse, dress and dress shoes appropriate to the season. And, in turn, male attorneys must wear a men’s suit. And supposedly airline pilots must have a second pair of goggles purchased.

Under what circumstances are these costs recognised?

In the case of personal items – especially if they are expensive and luxury items – the taxpayer must demonstrate the necessity of such a standard in order, for example, to gain the confidence of certain clients if he works in an industry where a certain standard is expected and the absence of such a standard will diminish that confidence. At the same time, he must be able to explain satisfactorily that such equipment is not used privately (e.g. by storing the watch in a safe after work and showing that the taxpayer has his own social watch for non-business purposes, etc.). If these conditions are met, the cost of acquiring such items should be treated as a tax expenditure.

When are these items over the line?

If the taxpayer were using items of a luxury nature, which, by default, the number already strays outside the bounds of what is reasonable to assume to be rational in the ordinary course of events.

Is there a specific case where the SAO or a court has not recognized something? What was the reason?

For example, the courts have dealt with a case concerning the procurement of spectacles by a crane operator who had an eye defect. In that case, the court did not consider such a cost to be a tax expense because the crane operator would have had to acquire the glasses anyway.

What is the difference if a sole trader and a one-person Ltd. put such beads in their costs?

It makes no difference whether you are a sole trader or a sole proprietorship – it must always be clearly demonstrable that the personal items are necessary for the conduct of the business. However, there is another problem with eserocoses – in the Slovak environment it is common practice for eserocos owners to confuse the company’s cash register with the statutory officer’s wallet.

How, for example, can the owner of even a one-person proprietorship dispose of the money in his business account?

Whether and how the money from a business account or cash can be used depends on whether you are a sole trader, an eseroca or a large company. Self-employed persons have a free hand in the use of money from their business account. They don’t have to worry about when and how they withdraw money from the business so that they can use it for private purposes as well. However, this is no longer the case if the business is an LLC – even a sole proprietorship. Smaller businesses in particular forget that an LLC is a business entity that is strictly separate from its owner corporately, accountingly and tax-wise, and the potential penalties for tax or legal offenses can be manifold as well. So it’s not just a question of whether a business can put a microwave in expenses because you heat up your lunch in it during home office hours. If an LLC owner wants to legally use the profits for private purposes, he or she must pay dividends (there are other options, but dividends are the basic, legal alternative), which are subject to withholding tax. In addition to paying dividends, there are other ways to cash out of a small company. The applicability of these is on a case-by-case basis.

What is the risk if he does not state that it was private consumption, etc.

In extra-legal terminology, it is a tunnelling of the company’s assets, for which not only the statutory body but also the recipient(s) of the benefits themselves are liable. And it may have criminal consequences in connection with other, non-tax offences (for example, defamation of a creditor). The topic of private use of corporate assets is thus very complex and the potential penalties for both tax and legal offences can be manifold.

Do large companies also make mistakes in taxing, for example, non-cash income? What are the most common things?

In larger companies, accounting and economic transparency is more present. Although the level of taxpayer aggressiveness discussed is lower by default, even larger companies cannot avoid technical errors. These include, for example, situations where corporate assets are used with full VAT deduction for employees’ private purposes, giving away shares in the company to employees without taxing and “justifying” this income, various non-cash benefits, and so on.

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