Types of Expenses That Businesses Can Deduct and Their Usage Conditions

One of the most critical topics for companies is expense deductions. But what are the conditions for deducting expenses? What qualifies as a deductible expense? What expenses cannot be deducted? In this Papel Blog post, we'll answer all your questions, including what constitutes a business expense, which expenses can be deducted, and key points to consider during the deduction process.

What Is a Business Expense?

 

Every business requires certain products and services to continue its operations. The costs associated with these products and services are called business expenses, which cover expenditures supporting daily operations. Correctly categorizing business expenses is essential. Misreporting or fraudulently claiming expenses is against the law and could result in penalties. Therefore, businesses must accurately report their expenses to ensure sustainability and maintain a trustworthy image.

For an expense to be deductible from business income and reduce the taxable base, it must be directly related to the company's profit or operations, per applicable tax regulations. Only expenses that meet this criterion qualify as business deductions. Identifying and documenting business expenses is critical for fulfilling legal obligations and ensuring financial health.

Why Is Expense Deduction Important for Businesses?

 

Deducting expenses provides businesses with several financial and operational benefits. Primarily, recording business-related expenditures as expenses reduces the taxable base, thereby lowering the amount of tax owed. For example, meals, transportation, office supplies, and staff costs can be deducted from taxes if supported by the correct documentation.

Additionally, claiming business expenses prevents companies from paying Value Added Tax (VAT) on applicable purchases. Furthermore, keeping accurate and organized expense records gives businesses a clear picture of their financial status, helping with budgeting, financial analysis, and strategic decision-making. Lastly, properly documenting business expenses ensures compliance with legal regulations. Incorrect or fraudulent deductions violate tax laws and may lead to penalties.

In other words, properly documenting business expenses allows companies to take advantage of tax benefits while maintaining healthy financial management. Adhering to the legal framework set by the Tax Procedure Law (VUK) is crucial for avoiding issues. To learn more about VUK, check out our article "What Is the Tax Procedure Law (VUK)? Everything You Need to Know About VUK Communiqués 507 and 509."

What Are the Conditions for Deducting Expenses?

For businesses to legally deduct their expenses, they must meet certain conditions. These conditions include:

Proper Documentation of Invoices and Receipts

For expenses to be considered valid, they must be supported by correctly issued documents. These documents include invoices, service receipts, expense vouchers, and payroll records. To comply with legal regulations, documents must be complete and contain accurate information.

Direct Relevance to Business Activities 

 

For an expense to be deductible, it must be directly related to business operations. According to tax regulations, a cost must be connected to the company's profit or activities to qualify as a deductible business expense. For instance, your stationery purchases can be deducted if you operate an office-based business.

Compliance with Tax Laws

 

Expenses must adhere to tax laws. Some expenses may be categorized as non-deductible (KKEG) and, therefore, cannot be deducted from taxes. Ensuring compliance with legal regulations is essential when deducting expenses.

 

What Documents Are Required for Expense Documentation?

 

To properly document expenses, businesses must maintain the following records. These documents must be complete and accurate to ensure legal validity and financial record accuracy.

Invoice

 

A document issued by the seller details the purchase of goods or services.

 

Expense Voucher

 

A document issued in two copies by the business for goods or services obtained from individuals who are not taxpayers. The voucher should include details such as the type and quantity of the goods, the name of the seller or buyer, the price, and the issuance date.

 

Service Receipt

 

A document issued by professionals for services provided.

Payroll

A document that records salary payments made to employees.

 

What Types of Expenses Can Be Deducted?

 

Businesses incur various expenses while operating, and some of these expenses can be deducted from taxable income. However, deductible expenses vary based on the company's field of activity. The main types of deductible expenses include:

Meal Expenses

 

Meal expenses incurred by business owners and employees during working hours can be deducted. These expenses must be documented with an invoice or receipt and must be business-related.

Employee Payments

 

Salaries, bonuses, and social security contributions paid to employees are business expenses. These payments must be documented through payroll records and bank statements.

 

Transportation and Travel Expenses

 

Expenses related to business travel, including public transportation, taxi fares, and fuel costs for company vehicles, can be deducted. Supporting documents such as tickets, invoices, and receipts must be kept.

 

Workwear Expenses

 

Expenses for work-specific clothing or uniforms required for business operations can be deducted. However, personal clothing expenses are not deductible.

 

Utility and Communication Bills

 

Electricity, water, gas, telephone, and internet bills can be deducted if issued in the business's name and properly documented.

Rent and Maintenance Fees

 

Rent payments and related maintenance fees for offices, shops, or other business premises qualify as deductible expenses. Lease agreements and payment receipts must support these costs.

Software, SaaS, and Advertising Expenses

 

Costs related to business software, subscription-based services (SaaS), and advertising expenditures can be deducted. Keeping invoices for these expenses is essential.

Office Expenses

Office supplies, stationery, and cleaning materials used for daily business operations can be deducted. Invoices should be retained for these expenses.

Consulting Fees

 

Payments for legal, financial, or technical consulting services required by the business are deductible. These costs must be documented through invoices and contracts.

Vehicle Expenses

 

Fuel, maintenance, insurance, and other expenses for business-related vehicles are deductible. Keeping invoices and payment records is crucial.

Gift Cards

 

Expenses for gift cards provided to employees or customers can be deducted within certain limits, provided they are adequately documented with invoices and delivery records.

 

Company Vehicles

 

Purchase, lease, maintenance, and other expenses for company-registered vehicles qualify as deductible expenses. Proper documentation is essential.

 

Key Points to Consider When Deducting Business Expenses

 

Properly categorizing business expenses is critical for both legal compliance and financial health. Key considerations include:

Business-Related Expenses Only

 

Expenses must be directly linked to business activities. For example, personal meals with family or friends and vacation costs cannot be deducted as business expenses.

Proper Documentation

 

Invoices, receipts, and vouchers must be correctly issued, containing details such as the expense type, amount, date, and involved parties.

Avoiding Non-Deductible Expenses

 

Some expenses, such as personal expenditures or phone bills, are not deductible under tax regulations. These should not be reported as business expenses.

 

 

Maintaining Proper Documentation

 

Appropriate documents, such as restaurant invoices for meals or tickets and accommodation receipts for travel expenses, should support all expenses. These records serve as legal proof in case of an audit.

Accurate Accounting Records

 

 

All documented expenses should be accurately recorded in accounting systems to reflect the business's financial status and comply with tax obligations.

Common Mistakes When Deducting Expenses

 

Errors in expense deductions can lead to legal and financial issues. Common mistakes include:

Claiming personal expenses as business expenses (e.g., individual meals, private vehicle fuel, or personal phone bills).

Deducting costs for assets not registered under the company's name (e.g., fuel or repairs for personal vehicles not leased or owned by the company).

Failing to keep proper documentation may result in expense rejections during audits.

By carefully following tax regulations and maintaining proper documentation, businesses can optimize their financial management while remaining compliant with the law.

Frequently Asked Questions

 

What is a tax refund?

In Turkey, the taxation methods and types applicable to individuals and businesses are defined by law. If businesses meet certain conditions outlined in these laws, they may be eligible to receive a partial refund of the taxes they have paid. This benefit is known as a tax refund.

For answers to all your tax refund questions, check out our Papel Blog post: "Tax Refund: How to Apply and How Does the Process Work?"

What are non-deductible expenses (KKEG)?

Non-deductible expenses (KKEG) refer to costs businesses cannot deduct from their taxable income under tax laws. These are generally personal expenses or costs that are not subject to taxation.

What are subscription-based services (SaaS)?

Subscription-based services (SaaS) are software services that users subscribe to for a specific period, typically making monthly or annual payments. Cloud-based software applications are typical examples of SaaS.

 

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