Information about Income TaxInformation about Income Tax>No.12015 Scope of necessary expenses

No.12015 Scope of necessary expenses

1 Amounts that can be included in necessary expenses

The amounts that can be included in necessary expenses when calculating business income, real estate income and miscellaneous income are as follows:

  1. (1) Cost of sales corresponding to total earnings, and the amount of other direct costs that were incurred to earn the total earnings.
  2. (2) The amount of selling, general and administrative expense and other business expenses that were incurred during the year

2 Period for including necessary expenses

The amount of necessary expenses is the amount for which the obligation has been determined in the year (there are also expenses for which the obligation has not been determined, such as depreciation expenses).
In other words, even if payment for the expense was made during the year, it will not be included as necessary expenses unless the obligation for the expense has been determined in the year. Conversely, even if the expense was not paid during the year, it will be included in the necessary expenses if the obligation for the expense has been determined in the year.
In this case, the obligation for the expense is deemed to have been determined in the year if the following three criteria are all met:

  1. (1) The obligation has been established by December 31 of the year.
  2. (2) The facts that cause specific benefits based on that obligation have occurred by December 31 of the year.
  3. (3) The amount can be reasonably determined by December 31 of the year.

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3 Notes for including necessary expenses

(1) In regard to individual business, an expenditure may be related to both domestic and business affairs (household expenses).

(e.g.) Entertainment and social expenses, land expenses, house rent, and utilities expenses
The portion of this household expenses that can be included as necessary expenses is limited to the amount that is clearly distinguishable as being directly necessary for business execution, based on the record of transactions, etc.

(2) Examples of expenses that can and cannot be included in necessary expenses:

(a) House rent, etc., paid to spouse or other relatives who live in the same household are not necessary expenses. Similarly, those who received such house rent, etc., cannot regard them as income.
This also applies when borrowing other assets, and not limited to land and houses. However, for example, if a child borrowed land or a building for business use from his/her father who lives in the same household, the cost of fixed asset tax, etc., imposed on such land or building are necessary expenses of the child's business.

(b) Salaries and wages paid to spouse or other relatives who live in the same household (excluding salary payments to family employees exclusively engaged in the business of blue [income tax] return filers) are not necessary expenses.

(Note) The amount of deduction for family employers who are not blue return filers are regarded as necessary expenses.

(c) Interest on borrowings for business such as borrowings to purchase business assets is necessary expenses.

(Note) The amount of interest on liabilities incurred to acquire land for operations that yield real estate income is included as necessary expenses when calculating the real estate income. However, if you have a loss (deficit) in your real estate income, the amount of loss corresponding to the amount of interest on the liabilities are not counted, and aggregation of profit and loss with other income is not permitted.

(d) Loss on demolition, removal and destruction of business assets and expenses incurred to repair business assets are necessary expense except for certain cases.

(e) Enterprise tax is fully included as necessary expenses, but only the portion used in business is included for fixed asset tax.

(f) Income tax and inhabitants tax are not necessary expenses.

(g) Fines, penalties and non-penal fines are not necessary expenses.

(h) Bribes provided to civil servants are not necessary expenses.

Items Examples of necessary expenses
減価償却費(繰延資産の償却費)
Depreciation
(Amortization of differed assets)
Depreciation expenses for business assets, including shops, vehicles and machines, etc. acquired at yen100,000 or over, or expenses for amortization of differed assets.
地代家賃
Land/House rent
The amounts of rent corresponding to a portion of lands and buildings used for business.
利子割引料
Interest and discount paid
Interest expenses for borrowed money used as business funds or used to construct or reconstruct a building for business, discount on notes receivable, etc.
租税公課
Taxes and Duties
The amounts of the enterprise tax, fixed assets tax, automobile tax, real estate acquisition tax, registration and license tax, stamp tax, etc., used for business purpose. Membership fees, union dues.
荷造運賃
Packing and Freight charges
(Shipping charges)
Material expenses needed to pack merchandise, packer expenses and freight expenses.
水道光熱費
Utilities
The amounts of water, gas, and electric charges, used for business.
旅費交通費
Travel expenses
(Transportation fee)
Travel/bus/car fare, hotel charges, etc., for business purposes.
通信費
Communications
Telephone charges, telegraph/stamp fees, etc., paid for business purposes.
広告宣伝費
Advertising
Expenses for advertising in newspapers and magazines, etc.
Expenses for handbills, inserts and advertising goods, etc.
接待交際費
Entertainment
Expenses for eating, drinking and trip, etc. to entertain customers.
損害保険料
Casualty insurance premiums
Premiums for insurance against loss, including automobile insurance and fire insurance on business assets.
修繕費
Maintenance, repair
Expenses for repairs and maintenance of shops and vehicles, etc. for business.
消耗品費
Consumable supplies
Expenses for office supplies, including stationery and gasoline for business vehicles. Furniture and fixtures acquired at under yen100,000.
福利厚生費
Welfare
Expenses for employees' recreation, hygiene, etc. Premiums for employees' social insurance that business proprietors are required to pay.