What is an expense?

It is an amount you had to incur in connection with your business. Expenses are supported by purchase invoices, receipts, payment schedules and other documents.

What is a tax-deductible expense?

The definition of a tax-deductible expense is found in the Income Tax Act. However, it is very broad: a tax-deductible expense is one demonstrably incurred to generate, secure and maintain income. What does that mean in practice? That a tax-deductible expense must relate directly to your business. The definition is broad because different expenses can fall into this category for different businesses. For most companies, these include rent, a domain name, a phone plan or the computer used to run the business.

For an athlete, for example, recovery in the form of a sauna or massage may be tax-deductible (it contributes to their economic activity). For a marketing agency, however, such an expense would not be deductible.

What is a non-deductible expense?

Logically, this is an expense that does not fall into the previous category. In addition, the Act lists expenses that are always non-deductible. We will focus on those now. 🙂

Expenses that are always non-deductible, with examples
Business entertainment expenses
  • You meet a client for business and pay for dinner/lunch/coffee
  • You organise a party for business partners and provide refreshments
  • You buy coffee for the coffee machine
Promotional and gift items
  • A promotional item costing more than CZK 500
  • A package of promotional items costing more than CZK 500 in total
  • Promotional items not marked with the company’s name or logo

If you want to give a business partner a bottle of alcohol (wine or spirits), it is always a non-deductible expense (the CZK 500 limit does not apply).

For VAT payers, the limit is calculated on the price excluding VAT. 🙂

Donations 
  • A donation to a charitable collection
  • A contribution to a foundation

Donations are non-deductible expenses. However, in your tax return, you also have the option to deduct charitable donations from the tax base. You can reduce your tax base by up to 30% in this way (in 2024 and 2025).

The cost of acquiring assets (tangible assets over CZK 80,000, intangible assets above your own threshold)
  • You buy a company car
  • You acquire a building
  • You create an asset yourself (build a house on a plot of land)

The acquisition costs themselves are non-deductible. But do not worry that the value of the purchased asset will never be recognised anywhere. For assets, the legislation requires you to spread acquisition cost over several years and claim expenses gradually through depreciation/amortisation. The number of years over which you must spread the acquisition cost varies by asset type (e.g. a computer 3 years, a hotel 50 years).

Expenses belonging to another year

If your supplier is careless and does not deliver an invoice for services provided in 2024 until autumn 2025, you have two options: amend your 2024 income tax return and add the expense there, or record the late invoice in the 2025 accounts as a non-deductible expense.

Fines from public authorities
  • A tax office penalty for filing a return late
  • Tax office interest for paying tax late
  • A speeding or parking fine
  • A Czech Social Security Administration penalty for failing to meet obligations
Other non-deductible expenses 

Other such expenses can include, for example, meal allowances above the limit, non-cash benefits above the limit or interest on related-party loans where the thin capitalisation test is not met. But these cases do not occur in every company, and this article is mainly for those starting a business :-).

And what does this mean in practice?

We will look at that next time. 🙂

If you have questions, do not hesitate to get in touch and we can discuss everything together!