When can you call an expense an investment? And what does that exactly mean?
Your business is running smoothly! So it’s time to really invest in it. Of course you put in your time and you may be doing a course to become even better at what you do or you might buy the latest MacBook. But what exactly is an investment? And are there any pros or cons when an expense is an investment?
What is an investment?
An investment is the expense for a business asset that will exist within your company longer than one production process and that costs more than € 450 (excluding vat)
A business asset is something you use in you company to do your activities. Mostly it’s a tangible object like a sewing machine in a sewing room or a laptop for a designer. You don’t always have to be able to touch it. For a webshop a website can be a business asset. The training you got for your business is not a business asset. The training might have increased your skills but you’re not using the education itself to keep your business running.
What is a production process? Just remember your investment needs to exist within the company for over a year. A laptop is an investment, because you use it to run your company for a longer period of time. When an interior designer buys a sofa for a client, then the sofa only exists within the company for one production. The sofa is a part of the project. If the designer would keep the sofa and put it in his shop window, then it is an investment, because the sofa now stays within the company for a longer period.
What are the consequences? Writing off an investment
Suppose your expense turns out to be an investment. What exactly does that mean? It means that you can write off a maximum of 20% of the expense a year. The investment is spread over a minimum of five years. You can also choose to write it of in ten years, but you can’t do it in three. Five years is the minimum. For five years your profit will be lower because of the MacBook, which means you pay less income tax. You do receive all your VAT returns at once, so writing off is only relevant for the income tax.
So it’s an advantage if you expect to have more profit in the future. The expenses can be useful then. But it’s a disadvantage if you prefer to keep your profit as low as possible in the year of the expense. If the expense wasn’t an investment (like the training) then you would declare 100% of the expense in the same year.
Is there another benefit when my expense is an investment? The KIA
My expense is an investment. Is there another benefit? There sure is! It’s the Kleinschaligheidsinvesteringsaftrek (KIA), the small scale investment deduction. When you invested more than € 2300 in one year then you get an extra deduction post. This is 28% of the figure you invested. So if you almost hit that amount by the end of the year it could be interesting to make another investment.
Translation by: Renée ter Berg