What are deductible and non-deductible expenses? We will talk about it in detail in this article.
According to Article 109 of Chapter X of the Tax Code of the Republic of Azerbaijan all other mandatory payments are deductible from income, except for expenses that are not deductible from income. All expenses must be justified and confirmed with documents.
What are non-deductible expenses?
- Expenses related to non-commercial activity are not allowed to be deducted from income.
- Entertainment and food expenses, as well as housing and other social expenses of employees are not allowed to be deducted from income.
- If the expenses of the taxpayer whose entrepreneurial activity is of an entertainment or social nature are incurred within the scope of this activity, the entertainment and social expenses are deducted from the income, respectively.
- An individual's expenses related to personal consumption or receiving wages (with the exception of the expenses incurred for the purchase of a Salary card) are not deducted from income.
- The part of the actual business trip expenses exceeding the norm determined by the executive authority is not deducted from the income.
- A cash register check or receipt is not considered a document confirming the expenses incurred during the purchase of goods (services, works).
- Documents obtained within the framework of non-commodity transactions are not considered documents confirming expenses deducted from income, and the value of goods (services, works) provided is deducted from income.
What are expenses deducted from income?
Limitation on interest deductions from income
The actual amount of interest paid to each other by mutually dependent persons on foreign debts in the same currency in the period to which the interest relates, not to exceed 125 % of the average level of interest on interbank loans published by the Central Bank of the Republic of Azerbaijan in the case of loan auctions or in the absence of auctions conditionally deducted from income.
If the debts received from abroad (excluding bonds issued by foreign banks or credit institutions, as well as bonds traded on foreign exchanges) are more than twice the net capital of the taxpayer, the interest calculated on the part of the debt that is more than twice the net capital is not allowed to be deducted from the income. These provisions do not apply to resident banks and credit institutions.
Bad and doubtful debts
How is the right of the taxpayer to deduct the amount of bad debt from income guaranteed by law?
According to the Tax Code, the amount of bad debts can be deducted from income in the following cases:
- If the income related to the provision of goods, rendering of services and performance of works is included in the gross income obtained from the previous entrepreneurial activity
- If the bad debt amount is written off as a bad debt in the taxpayer's accounting books
Bad debt refers to debts whose claim period has expired, debts for which the claim for debt repayment has been rejected by the court.
Banks and various credit organizations carrying out banking activities are provided by legislation according to the rules, the special reserves created by taking into account the classification of assets are entitled to deductions from income for taxation purposes.
Allocations to reserve insurance funds
The norms established by the legislation of the Republic of Azerbaijan ensure the right to deduct the amounts allocated to reserve insurance funds from the income of legal entities engaged in insurance activities.
Expenditures for scientific research, project-research and experimental construction works
Expenditures for scientific research, project-research and experimental-constructive works conducted for the purpose of obtaining income (with the exception of funds spent on the purchase and construction of fixed assets, as well as other amounts of a capital nature) are deducted from income.
Amounts deducted for depreciation deductions and for depreciable assets from income
Depreciation deductions for fixed assets used in entrepreneurial and non-entrepreneurial activities, defined in Article 99 of the Tax Code, are deducted from income.
Land, works of art, buildings and structures with rare architectural and historical monuments and other assets not subject to depreciation are not depreciated:
- equipment, models, samples, exhibits, working and non-working models and other visual aids used in cabinets and laboratories for the purpose of scientific research, teaching and practice;
- fertile animals;
- animal world exhibits in zoos and other establishments;
- multi-year plantings that do not reach the operational time;
- film funds, library funds, museum assets (exhibits), stage props;
- fully depreciable fixed assets, if they are usable;
- conserved fixed assets;
- highways intended for public use;
- common parking equipment;
- fixed assets in non-operational storage.
Depreciation rates are defined as follows:
- capitalized costs for land improvement, buildings, constructions and facilities - up to 7 %;
- machines and equipment - up to 20%;
- on high-tech computing equipment - up to 25%;
- vehicles – up to 25%;
- working animals – up to 20%;
- expenses incurred on preparatory works for extraction of natural resources and geological-exploration works - up to 25 %;
- intangible assets - up to 10 % for those with an unknown useful life, and for those with a known useful life, with amounts proportional to the useful life in years;
- other fixed assets - until 20%;
Depreciation deductions of micro-entrepreneurial entities by applying 2 coefficients to the determined depreciation norms;
Small business entities have the right to deduct depreciation deductions from income by applying a 1.5 factor to the established depreciation norms.
Depreciation deductions for buildings, facilities and structures are made separately for each building.
For the purposes of depreciation calculation, the residual value of fixed assets at the end of the tax year consists of the following amount (not lower than zero):
To the residual value of the fixed asset at the end of the previous year, the value of the fixed asset received in the current year, as well as the part of the repair costs in the current year that exceeds the limit, is added. the residual value of funds is deducted. The increase resulting from the revaluation of the fixed asset is not added to the residual value of the fixed asset at the end of the tax year for the purposes of the depreciation calculation.
If the amount obtained from the provision of a fixed asset is greater than the residual value of that fixed asset, the resulting difference is included in income.
At the end of the year, if the residual value of fixed assets is less than 500 manats or less than 5 percent of the initial value, the amount of the residual value is deducted from the income.
If the amount obtained from the provision of the fixed asset is less than the residual value of that fixed asset, the resulting difference is deducted from the income.
Only 40 percent of the calculated depreciation of the assets purchased or installed at the expense of the funds allocated from the investment expenses of the state budget to state enterprises is deducted from the income.
Deducting repair costs from income
The amount of maintenance expenses that must be deducted from income is limited to a certain percentage each year.
- capitalized expenses on constructions and facilities, buildings, land improvement - 2 % of the residual value at the end of the year
- machinery and equipment – 5 % of the residual value at the end of the year
- on computing equipment, which is a product of high technologies - 5 % of residual value at the end of the year
- vehicles – 5 % of the residual value at the end of the year
- other fixed assets - 3 % of residual value at the end of the year
- non-depreciable fixed assets - 0 % of the residual value at the end of the year
If the actual amount of repair costs is less than the amount determined by the above threshold, the actual amount of repair costs is deducted from the income.
Deduction of insurance premiums from income
Insurance premiums paid by the insured and reinsured are deducted from income, except in the following cases.
Amounts calculated for property damage insurance for the benefit of employees
Insurance premiums on life insurance contracts signed with foreign insurance companies
Calculated and paid by natural persons from not more than 50 percent of their taxable income on the basis of insurance contracts (on pension insurance and life savings insurance) concluded with AR insurers for a period of not less than 3 years and providing for the payment of insurance payments after 3 years from the date of entry into force of the insurance contract the insurance premium is deducted from the income of that individual for the purposes of taxation.
Pension insurance and life savings insurance premiums deducted from the income received in connection with salaried work of an individual are deducted only if they are paid to the insurer's bank account through the bank.
Expenditures incurred for geological-exploration works and preparatory works for extraction of natural resources
Expenditures incurred on preparatory work for geological exploration and extraction of natural resources (up to 25 %) are deducted from gross income as amortization deductions.
This article is also applied to expenses incurred by the taxpayer on intangible assets to carry out geological exploration and obtain the rights to exploit or process natural resources.
Expenditure on intangible assets
Expenditures incurred for intangible objects used by a legal entity and an individual in economic activity for more than one year belong to intangible assets.
Expenditures on intangible assets (up to 10 % if the useful life is unknown, and in proportion to the useful life in years if the useful life is unknown) are deducted from income as amortization deductions.
If the expenses incurred for the production or purchase of intangible assets are deducted from the income during the calculation of the taxpayer's taxable income, such expenses are not included in the value of the amortized intangible asset.
Limitations on deductions from income
The following interest, taxes, fines and financial sanctions cannot be deducted from income:
- Income tax paid on the territory of AR or other states or any other tax calculated on income
- Interests, administrative fines and financial sanctions calculated in accordance with the Tax Code
Damage caused by the presentation of property
The loss of a natural person arising from the provision of property (other than the property from which the income obtained from the provision is exempted from taxation or the property used for economic activity) is compensated at the expense of the income obtained from the provision of such property. If the loss incurred cannot be compensated in that year, it is carried over to the next period lasting up to three years and compensated by the income from the disposal of such property.
Conveyance of loss
The part of the expenses of the enterprise that is allowed to be deducted from the income, exceeding the income, is carried over to the next period lasting up to five years and is compensated at the expense of the profits of those years, without setting a limit on the years.
The part of the expenses allowed to be deducted from the income obtained from the entrepreneurial activity, which exceeds the total income, cannot be deducted from other incomes, but it can be transferred to the next period lasting up to three years for compensation from the general income from the entrepreneurial activity in future periods.
Losses incurred during the period when the taxpayer is a payer of income tax, as well as the estimated repair costs and the sums incurred due to the application of a rate lower than the depreciation rates and carried over to the following years are not compensated at the expense of the next year's income.
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