“If you don’t advertise, you die!” This quote, which is attributed to the American auto mogul Henry Ford, is still valid today and not only for vehicle manufacturers. Representation costs play an important role for almost all companies. However, the term is neither a business nor a legal term.
The marketing department often means something completely different than the accounting department. Because even if all representation costs ultimately serve the same purpose and are intended to promote sales, they are treated very differently in terms of tax and commercial law. In this article we therefore explain the different categories of representation costs and the consequences of assigning them to a specific group.
What are representation costs in the strict sense?
Of course, a full-page advertisement in the local newspaper also serves to present a company to the outside world. But these are not the kind of entertainment expenses that make the accountant nervous. Because the principle of entrepreneurial sovereignty applies in Germany . This means that every company owner decides for himself which investments to make and how to run his business. The tax office must also recognize economically nonsensical expenses as business expenses. There are exceptions to this principle, as described in Section 4 (5) of the Income Tax Actare anchored. This standard lists a number of operating expenses that are either not allowed to reduce profit at all or only to a limited extent. These include in particular:
- Gifts to business partners
- Catering for business partners
- Guest houses for business partners who are not located at the headquarters of the branch
- Expenses for hunting or fishing, for sailing or motor yachts as well as for similar purposes (e.g. golf, tennis, top football, motor sports) and for the associated hospitality
- Expenses that affect the lifestyle of the taxpayer or other persons, insofar as they are to be regarded as inappropriate according to the general public opinion;
When entertainment costs become a problem, they usually belong to one of the groups mentioned. In the case of sole proprietorships, the fact that the operational and private areas often merge with one another is a problem. The sophisticated city villa from the Wilhelminian era is often not only inhabited because the family feels particularly comfortable there, but also because a farmer’s cottage in the country could irritate business partners. Expenses that – from the point of view of the tax office – are primarily attributable to private life can generally not be claimed as business expenses . Examples of representation costs of this kind are in addition to the private apartment
- Business clothing (suits, costumes, etc.)
- Evening wear
- Costs for participation in cultural or social events (opera gala, benefit concert, Oktoberfest, etc.)
- Elite schools for the children
- (expensive) vehicles that are used exclusively for private purposes
- Riding horses, sailing yachts, airplanes, etc. for recreational use
What do you have to pay attention to with mixed expenses?
As already mentioned, business and private life cannot always be clearly separated. The privately used company car is a classic. An entrepreneur can either keep a logbook for the company car and split the costs according to kilometers or make use of the 1 percent rule . However, since this is a case of Section 4 (5) No. 7 EStG , which affects the taxpayer’s lifestyle, these costs must not only be correctly allocated, but also reasonable. If the entrepreneur does not opt for any medium-sized car, but for an expensive old-timer or a luxury sports car for representative purposes, he can be refused tax deduction.
The appropriateness test is always based on the individual case. For example, the tax office is more likely to give the owner of a large car dealership, which generates seven-figure sales annually, a luxury vehicle than the small business owner who runs an antiquarian bookshop and has inherited the money for her Ferrari. According to the case law of the BFH, the measure of appropriateness is the general public opinion, which should be based on the view of broad sections of the population and not just on the opinion of the business circles involved. This is an extremely vague rule of thumb, so recognizing these costs as business expenses also depends on your negotiating skills.
Entertainment Expenses – The particularly critical entertainment expenses
There is a lot to consider when entertaining business friends and even your own employees run the risk of falling into the tax trap if the boss invites them to the party.
Catering for business partners
Was there too much celebrating for the tax authorities in the German executive suite? For some years now, companies have had to pay for this at least partially out of their own pockets. However, the new rule also applies to normal business meals with customers or suppliers. According to Section 4 Paragraph 5 Sentence 1 No. 2, a maximum of 70 percent of the expenses for such events may be deducted from the tax assessment base. And only if they are appropriately and adequately documented. The appropriateness again depends on the individual case. For the chairman of Deutsche Bank, a different framework is certainly appropriate than for the corporate account manager of the local city savings bank.
The requirements for the documentation are independent of this. The documents must show who, when, where and why ate a meal and what was consumed. Most restaurants already have corresponding invoice forms in which all the data required by the tax office can be entered. The detailed receipt must also be kept so that the tax office can also make sure that only table wine and no champagne was served. The latter would not be appropriate and therefore must not reduce profits.
Hospitality for employees
The company also presents itself to important stakeholders at company parties : after all, employees are the most important asset for many companies. There are also no traps lurking here that prevent business expenses from being deducted, but that does not mean that caution is not required anyway. If the appetizers at the Christmas party are too generous, the snack quickly becomes a non-cash benefit subject to wage tax! This can be avoided solely by strictly observing certain legal premises; Section 19 (1) sentence 1 no. 1a EStG is relevant. According to this, gifts in the context of company parties remain tax-free if
- participation is permitted for all employees or all employees of a part of the company and
- No more than 110 euros are spent per employee and event
However, the tax privilege only applies to a maximum of two such events per year. If the celebrations are more frequent or lavish, the employer has the option of taxing these benefits at a flat rate ( Section 37b of the Income Tax Act ). The employer then pays a flat rate of 30 percent tax on the benefit in kind. This possibility also exists if the donation would benefit third parties, for example employees of a customer, and would trigger an income tax liability for them.
In order to keep track of all costs and taxes incurred, it is worthwhile to keep everything tidy and to prepare a tax return as a small business !