Deductibility of expenses
In determining taxable income, there is a wide range of expenses that can be deducted from the profit as indicated in the profit and loss accounts. Some of those expenses are 100% deductible, some of them are partially deductible and others are not deductible at all.
As a general principle, all the expenses incurred in order to carry on the company activity are eligible to be fully deducted from the profit.
However, if some of these costs are incurred both for company reasons and for private reasons, the percentage of deductibility is less than 100%.
Only the costs indicated in the P&L statement can be deducted for tax purposes.
The following list gives some examples of deductible costs and extent of their deductibility:
- depreciation: they are deductible pursuant to a decree (Min. Decree 31.12.1988) which establishes the different percentages of annual deductible depreciation for specific assets;
- cost of labor: all the costs related to wages, social and health contributions paid by the company are deductible;
- other taxes: apart from IRAP (deductible only up to 10% of the amount paid), other taxes are deductible in the fiscal year they have been paid;
- provisions: most provisions cannot be deducted for tax purposes since they are not relevant under a tax perspective;
- telephone costs: they are deductible for 80% of their amount;
- costs related to cars: if a car is used exclusively for business purposes, the costs are entirely deductible, other- wise, they can be deducted in different percentages (70% to 80% – at 27,5%) depending on the user and the conditions for use;
- gifts: they are entirely deductible if their value is less than EUR 50 each (gross VAT);
- entertainment expenses: deductible within the following limits: a. 1.3% of the annual sales (for annual sales below EUR 10 million); b. 0.5% of the annual sales (for annual sales within EUR 10 million and EUR 50 million); 0.1% of the annual sales (for annual sales of more than EUR 10 million);
- costs for goods and services purchased from companies residing in tax havens are deductible only if certain conditions are met. In any case, the relating amounts have to be indicated in the annual tax return.