How deductions work in a sole proprietorship?

One of the advantages of being your own is that you can “take things on the firm”, thereby reducing the tax and avoiding VAT. But it’s not that simple. You can not start buying everything at the company as soon as you start your own, there are limits. A misstep can have legal consequences and for you as a self-employed person it is important to know what is meant by deduction.

What does deduction in sole proprietorship mean?

Deductions in sole proprietorship usually mean deductible expenses, expenses you can post as expenses in the sole proprietorship. The reason entrepreneurs are interested in finding approved deductions is that higher costs mean lower reported earnings. It wants to have as low a profit as possible because it forms the basis for the tax in the sole proprietorship. In addition, if you sell goods or services subject to VAT, you get the VAT back when you buy goods and services at the company. Some expenses are in the gray area to be deductible, which allows you to both make money and avoid tax problems if you have good track of your deductions.

What is allowed to make deductions?

You are allowed to make deductions for all goods and services that are used to make money in the company. For small business owners, and especially individual firms, the boundary between the firm and private life is often blurred and some purchases can be used in the company as well as private.

As we mentioned earlier, it is advantageous to account for purchases as costs in the company, which creates incentives for “taking goods at the firm”, although they will mainly be used privately. Doing so is prohibited and below we will review how you relate to purchases that you are unsure about.

Deductions in the gray zone

If you buy something that can be used both privately and in the company, and report it as a deductible cost, you can be forced to prove how the product or service fits into your business. Thus: justify how the purchase helps the company make money. If the Tax Agency considers that the deduction does not belong in the company, you must correct it and pay the lost tax afterwards. You may also be imposed a penalty.

But how to know if a purchase in the gray zone is within the framework of deductions? Using your common sense, you know what is needed to create value in the company.

If you are still unsure, you can look at the Tax Agency’s deduction dictionary. I recommend that new entrepreneurs take a turn there to get an overview on deductions.

Cost of premises in sole proprietorship

If you rent or own an office outside the home, you may deduct rent for premises and operating costs. But what about the entrepreneur who works from home? Good news. It is possible to make deductions to the Home Office of an individual firm.

But it is not simply. How much you can post as cost depends on the type of Home Office you have.


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