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How to expense as many expenses as possible to reduce your taxes.
Excessive expense accountingsuffer a tax auditThis also means that...
In this article, we will discuss some common "dangerous expense accounting" practices.With examplesLet me explain.
We will also introduce how to deal with gray areas and how to draw the line, so please use this as a reference.
The first prerequisite for expenses is whether they are necessary for your business.
The first thing you should not forget is that the most important point to determine whether or not something can be considered an expense is the following one.
Is the expense necessary for the business?
This judgement will be the basis for everything.
However, be careful because the tax office's "judgment" can be surprisingly strict. Whether something is an expense or not depends on the business you are running and the circumstances of each individual. It is dangerous to assume that just because someone else included it in their expenses and it was okay during a tax audit, you are okay too!
1. Expenses for personal expenses
example:
- Dining out with family is recorded as "meeting expenses"
- Personal travel as "business trip expenses"
- Declare your home furniture as "equipment"
Why is it dangerous?
This is already the beginning of tax evasion.
The tax office said,Expenses with a high proportion of family and personal use" is very sensitive to
Tax office checkpoints:
- Who did you go with? (Does the receipt state the number of people and purpose of the trip?)
- Are the date, time and location related to work?
- Inconsistencies with social media and location information (You can even see Instagram posts from your travels!)
2. All rent and utility costs for your home/office can be expensed
example:
- Of the 100,000 yen rent, declare the entire 100,000 yen as an expense.
- 100% of electricity, water and communication fees are expensed
Why is it dangerous?
Even if your home is also your office, you will need to apportion household expenses based on the area and time used for business.
Safety Line Concept:
- Area-based: The proportion of the area of rooms used for business purposes only
- Time-based: Percentage of the day you work
In generalWithin 30 to 50%It's reassuring to keep it like this.
3. Purchasing luxury cars and branded goods
example:
- Lexus and Mercedes Benz are fully expensed as business vehicles
- Declaring luxury watches as "sales tools"
- High-end brand bags and suits are used as "costume expenses"
Why is it dangerous?
Since the portion used for private purposes cannot be expensed, it is necessary to apportion it to household expenses. It is generally difficult to expense items that can be used for private purposes, such as luxury watches and brand-name clothing. However, if it is clearly only for business use, it may be possible to expense it (such as T-shirts with company names or stage names).
Identifying the grey area:
- Even if it is a luxury watch, can it be explained as being for "video shooting" purposes, such as making money from the watch?
- Is there a record of the car being used for business purposes (mileage and usage record)?
4. Hobby-related spending
example:
- Fishing and surfing equipment "for refreshment"
- Cafe hopping and sweets sampling "for inspiration"
- Purchase of game software for game streaming
Why is it dangerous?
It's very unclear whether it's a "hobby that leads to work" or "work disguised as a hobby."
The former is OK, the latter is a no-no.
point:
- Is there actually revenue being generated from the activity? Is it necessary for video streaming and is it actually a profitable business?
- Is it directly related to outreach or sales activities? You can sometimes prove your objectivity by publishing video or image evidence.
5. Cash expenditures without receipts
example:
- Taxi fares paid in cash and without a receipt
- Thank you and gratitude to acquaintances
Why is it dangerous?
If there is no document to proveHard to be recognized.
Also, "provisional receipts" and "blank receipts" are a big no-no!
countermeasure:
- If you can't get a receipt, leave a note + photo + details
- Keep a record by going cashless as much as possible
Here's what the tax office is looking for! Points that are likely to raise suspicion
- Fixed monthly entertainment expenses (unnatural, such as a flat rate)
- Frequent dining out at the same restaurant with the same people (whether the business partner is making more money than they spend)
- Excessively large deficits (several years in a row is a warning sign)
- Expense structure not commensurate with business activities
Summary: Don't be too aggressive or too defensive when it comes to expenses
When recording expenses, the criterion is whether the expenditure is related to your business.
There are three main points to note:
- Expense only those expenses for which you can explain the purpose
- Keep evidence (receipts, records, photos, daily reports, etc.)
- Record at a reasonable amount and rate
Even if you are audited by tax authorities, you will be fine as long as you can explain that "this was necessary for this reason."
Some sole proprietors and freelancers may file their own tax returns, but many people hire a tax accountant because it is very reassuring to have someone to handle their daily tax worries and deal with the tax office when they are audited. It is a smarter use of time to leave the troublesome tax returns to an expert and use your time to earn money from your main job.