In Finland, income taxation is net taxation. It means that you can deduct expenses for the production or maintaining of income from your gross income.
The taxation of companies is calculated based on their profit. To avoid paying too much taxes, it is advisable to deduct all deductible expenses from the turnover before taxation. If the income is greater than the expenses, the company has taxable income. If the expenses exceed the income, the company makes loss, which can be deducted from the income produced in the next 10 tax years.
Deductions for expenses are filed in tax returns, and they can be accounted for beforehand, in tax prepayments.
Different expenses are deductible for different company forms. One of the clearest differences between private traders and partnerships (general and limited partnership) is that self-employed individuals with a Business ID cannot deduct private withdrawals from the company’s income as “salary” paid to themselves, their spouse or their children under the age of 14. In other company forms, paid salaries are deductible.
Also light entrepreneurs and freelancers without a Business ID (as well as salaried workers) can deduct certain expenses from their taxes, but light entrepreneurs do not have the same deduction rights as companies.
In principle, all investments related to companies’ business activities are deductible unless explicitly decreed otherwise. Here, too, there are some differences between company forms. For instance, limited companies can deduct all telephone and car expenses. In comparison, private traders have to file an account on how much they have used their phone or car for business purposes and how much for private use. Expenses for business use are deductible.
Some examples of deductible expenses:
- Expenses for work premises can be deducted based on either actual expenses or the home office deduction determined by the Tax Administration. The expenses can include rent, loan interest, monthly payments to the housing company, electricity and heating.
- All travel expenses related to business activities are deductible.
- Expenses for advertising, marketing and sponsorship can be deducted if they support your business activities.
- Deductible expenses can also include professional magazines and journals (including those delivered to your home) and newspapers delivered to your company’s place of business.
- Association membership fees that are related to the company’s industry are deductible as well.
- Furthermore, half of entertainment expenses can be deducted; this includes, for example, business lunches. However, it is recommendable to write down who were present at the lunch and how it related to your business activities so that you can justify why the expenses should be deducted. In principle, reasonable meeting expenses are deductible.
- Small purchases as well as equipment and tools with a useful life of less than three years can be deducted as one-off expenses through a profit and loss account. Otherwise, you can enter the expenses in your tax accounting, in which case the cost can be deducted over the coming years. Short-lived, low-value investments include mobile phones, laptops and some tools. A single low-value asset may cost a maximum of 850 euros, and the maximum limit of annual deductions for these investments is 2,500 euros. If the investment is solely for business use, the price can be deducted in its entirety. Then again, if the investment is for both business and private use, the deduction right is 50 per cent.
For private persons and partnerships, the tax authority calculates an entrepreneur deduction of 5 per cent of the company’s taxable profit. This deduction aims at making the tax treatment of these company forms more equal to that of limited companies.
Depreciation expenses
Larger investments are deducted through depreciation expenses. Fixed assets, such as machinery, equipment, buildings and so on, wear and tear in use, causing their value to decrease over time. Therefore, you can make annual depreciation entries in your tax accounting, known as depreciation expenses. Depreciation expenses reduce your company’s profit, consequently also decreasing the amount of your company’s income tax. Fixed asset depreciation expenses are deducted on the basis of residual acquisition cost (percentage of the value) or straight-line annual depreciation (split evenly over the time of use). The depreciation starts from the year you start using the asset (not the year of purchase).
The maximum percentage of residual acquisition costs for machinery is 25 per cent. You can also make the depreciation with a smaller percentage. All your fixed assets are treated as a whole. In other words, you sum up all your machinery, equipment and so on. The deduction is calculated based on the remaining total. In the first year, that is the full purchasing price.
Straight-line annual depreciation is calculated based on the purchasing price (including installation, transportation, etc.), so that the purchase expense is split evenly over the useful life of the investment. For example, for technical equipment, the straight-line annual depreciation time can be 4–6 years and, for buildings, 10–30 years.
Source of income, income type, deductions and depreciation expenses
In the Finnish tax system, income is divided into three sources of income: business income, agricultural income and personal or other income.
The amount of taxable income is calculated separately for each source of income. In addition to this categorisation, Finland has a schedular system of income taxation with two income types: capital income and earned income.
Deductions and depreciation expenses are aimed at the source and type of income within which they have occurred. For instance, you cannot deduct expenses that occurred in gaining capital income from your earned income; you need to deduct them from your potential capital income.
Bookkeeper
For private traders, bookkeeping and tax returns are not very complicated, so you don’t necessarily need a bookkeeper. However, if you have a large-scale business with multiple types of expenses, it is practically and financially more sensible to hire a competent bookkeeper or a bookkeeping company. They know how to consider all deductible expenses, depreciation expenses and other complex details of the tax system. That way, you will save yourself much trouble and money.
https://www.vero.fi/en/businesses-and-corporations/
About tax deductions for companies: