Representation costs and negotiation costs in accounting – Learn the difference
Are you a business owner wondering what kind of tax deductions you are entitled to? If yes, keep reading; in this article, we will tell you with practical examples
- what are the differences between representation costs and negotiation costs
- how you can deduct these costs in your company’s taxes.
You can save a lot of money if you do planning and documentation well – so we recommend you to read this article carefully!
Representation costs – what are they?
Representation costs are defined as costs that are directed at stakeholders outside your company, like customers. Representation costs can be incurred, for example, when you invite your client over lunch to negotiate the terms of a future contract. In general, these costs are the result of maintaining or developing your company’s business relationships. Representation costs can also arise when you are trying to create new business relationships. Business gifts are one very typical form of this kind of costs.
Representation costs can also arise from, for example, accommodation and travel expences when you are on a representation trip, as well as expences related to an apartment or property that is used in representation events. You may also have hired catering staff for the representation event, in which case their wages are counted as representation costs. Representation costs also include depreciations that are made from the acquisition costs of an asset that is intended for representation.
Please note that representation costs are only 50% tax deductible. At the same time, you should also remember that if the representation costs include value added tax, this tax is not deductible.
Negotiation costs vs. representation costs
The main difference between negotiation costs and representation costs is that, while representation costs always consist of costs caused by stakeholders outside the company, negotiation costs are usually caused by your company’s internal negotiations. You may, for example, negotiate with different authorities or meet your auditor, in which case you will incur negotiation costs. You can deduct these expenses 100% in your company’s taxes.
Please note that large amounts of alcohol or extravagant food are not accepted as meeting costs. However, the usual catering during negotiations is considered negotiation costs, which you can deduct in full for taxation. For example, if you organize a Christmas party for your company’s own employees and you can verify that the catering at the party was reasonable, you can deduct the costs caused by the catering in your taxes in full.
Although the basic principle is that negotiation costs are incurred within your own company, in some cases, negotiation costs may also be incurred when negotiating with your customers and offering them something small and usual.
If you are going to deduct this kind of costs in taxation, make sure that you have documents that describe the nature of the event, as well as with whom and why the event was organized. Accurate documentation is important, because without proper evidence, your company’s negotiation costs are easily interpreted as representation costs; in this case, you can’t deduct as big amount in taxes than you originally planned.
For a small entrepreneur, the difference can be significant, especially if there are many events to be organized.
For example, you offer a corporate lunch worth 100 euros to your important client. After the income benefit, your company’s net cost of lunch is around 90 euros. You can deduct 50% of this, i.e. half in income tax when the income tax is 20%. However, if the delegation lunch is interpreted as a negotiation cost, the net cost of the lunch for your company is only about 70 euros, from which you can deduct 100% in income tax, with income tax at 20% and VAT deduction at 14%. If such lunches are offered often, the difference is significant for a small entrepreneur’s economy.
Sometimes the difference between negotiation and representation costs is vague, but since some costs can only be deducted in taxes by 50% and others by 100%, it is in the entrepreneur’s interest to try to verify that the right to deduct is 100%. Therefore, take care of documenting the negotiation sessions you organize! Receipts and invoices, which contain mandatory markings such as the date of issue, the seller’s VAT number and the tax rate, are considered documents. A small entrepreneur should try to make the most of the deductions.
If you need more detailed instructions, we recommend reading more on the subject on the Tax authority’s website.
Summary
Negotiation costs:
- Internal company meetings
- Lunch with an auditor or consultant, for example
- Small servings
- Christmas party with the staff, if the service was reasonable
- 100% right of deduction in business income taxation
Representation expenses:
- For example, customer meetings or lunch with a customer
- Value added tax cannot be deducted from representation expenses
- 50% right to deduct business income tax
Representation expenses or negotiation costs? Don’t worry, we’ll help you!
If you need additional tips on these matters or a shoulder to get support from, don’t hesitate to contact us. You should always check these matters with your accountant, especially if you are unsure whether it is an agency fee or a negotiation fee.
The customer service of UKKO Yrittäjä toiminimelle answers the phone on weekdays from 9 a.m. to 4 p.m. on 09 427 208 61. You can also contact us via email: asiakaspalvelu@ukkopro.fi.