Corporation Tax Deductions
What expenses can a company set against its profits?
- A company is, in general, entitled to deductions in respect of revenue expenditure - wholly and exclusively incurred for the purposes of its trade - against its profits.
- It is not, however, entitled to claim a deduction in respect of business entertainment expenses nor is it entitled to claim a deduction in respect of capital expenditure.
- It may, however, be entitled to capital allowances in respect of certain capital expenditure e.g. wear & tear allowances - see below.
- There is an allowance for wear and tear of plant and machinery in use for the purposes of a trade at the end of an accounting period. The allowance is calculated by reference to the cost of the item (less any grants received) and the allowable expenditure may be written down at the rate of 12.5% on a straight line basis. A wear and tear allowance is also available in respect of expenditure incurred on motor vehicles - also at the rate of 12.5% on a straight line basis.
- Capital allowances are also available in respect of expenditure on transmission capacity rights, computer software, energy efficient equipment including electric and alternative fuel vehicles, and industrial buildings and specified intangible assets (see Tax Briefing issue 09 July 2010). The rate at which the expenditure may be written down varies according to the type of expenditure incurred.
- It should be noted that depreciation of capital assets as computed for audited accounts purposes is not an allowable expense against the company's income for the purposes of Corporation Tax.
What about pre-trading expenditure?
Expenditure which is wholly and exclusively laid out for the purposes of a company's trade or profession in a three year period before commencement is allowed as a deduction in calculating the profits of the company following commencement. (See Section 82 TCA 1997) (PDF, 2.3MB).
Interest and other annual payments including Patent Royalties
A company is normally entitled to deduct payments of interest (other than interest treated as a distribution), royalties and other annual payments made by it in computing its Corporation Tax liability. In certain circumstances the company may have to deduct income tax from the payments and account for it to Revenue. Finance Act 2011 abolished the exemption from tax for income from qualifying patents so withholding tax will now have to be deducted from all patent royalty payments except those covered by the Interest and Royalties Directive, those covered by section 242A of the Taxes Consolidation Act 1997 and those covered by the administrative practice referred to in SP CT/01/10. Tax withheld by a company on patent royalty payments is treated as corporation tax and must be included in the company’s corporation tax payments.
- A company is entitled to claim deduction for donations to an approved body as if it were a trading expense.
- The minimum donation in any year to any one approved body is €250.