Tax benefits for entrepeneurs: take advantage of the available deductions and benefits
You have registered as a self-employed person with the Chamber of Commerce or you are about to start your own business. Most starting entrepreneurs start with a sole proprietorship. But you can also work through a BV (private limited company) or cooperate with others in a V.O.F. What taxes do you have to deal with as an entrepreneur? What deductions are there for entrepreneurs? Starting your own business often requires the necessary financial investments. Fortunately, there are a number of useful tax breaks that you can use to your advantage as a self-employed person (provided you meet the requirements).
Article: Soleproprietorship or limited company (BV)?
Registration in the trade register of the Chamber of Commerce
First step to become self employed is that you register your one man business in the trade register of the Chamber of Commerce. You need to make an appointment for this: https://www.kvk.nl/english/making-an-appointment-with-the-chamber-of-commerce/online-appointment/. Once you are registered the tax authorities are automatically informed. Then contact us for assistance with your bookkeeping, VAT and income tax obligations.
Stop worrying about your administration!
Let expatax help your with your bookkeeping and tax obligations.
Is every self-employed person entitled to deductions?
Not every entrepreneur or self-employed person is automatically entitled to the various deductions. The idea that a registration with the Chamber of Commerce or meeting the annual hours criterion is sufficient for this is based on a misunderstanding.
Whether the tax authorities will actually regard your business activities as ‘profit from business’ is somewhat more complicated.
When are you an entrepreneur for the tax authorities?
If you are an entrepreneur for VAT purposes, this does not automatically mean that you are also an entrepreneur for income tax. Your business must participate in the ‘economic traffic’ and make a profit. The tax authorities ask themselves the following questions:
- Do you make a profit and if so, how much? If you only make a small profit or structurally suffer losses, you are not an entrepreneur according to the tax authorities.
- How independent is your company? Do you decide for yourself how you carry out your work and how you organize your business? Then you will more quickly be seen as an entrepreneur
- Do you have sufficient capital to start a business? According to the tax authorities you need to have capital to be able to invest in advertising, hiring people and insurance. Furthermore, you must be able to ensure continuity by the company in lesser times for a while to keep running.
- Do you put enough time into your business? Entrepreneurs must work a minimum amount of hours on their business to show that they are an entrepreneur for the tax authorities. For example, you must meet the hour criterion of 1,225 hours per calendar year to be eligible for the tax benefits. Furthermore, your business must be profitable. If this is not the case, the tax authorities see your work as a hobby and you fall into another category of income tax (see below)
- How many clients do you have? You should strive to have multiple clients. This will reduce your business risks and increase your independence and self-reliance.
- Are you promoting your business? An entrepreneur must actively show both offline and online that he has a business and should promote it. This can be done by advertising, your own website or a logo.
- Is there an entrepreneurial risk? If you run the risk that clients do not pay for services provided and if you are dependent on the supply and demand for your products or services, you run a business risk. Anyone who is at risk is considered an entrepreneur
- Are you liable for your company’s debts? If you have a sole proprietorship, partnership or general partnership, you are jointly and severally liable for the debts and you are an entrepreneur for income tax purposes
If your company is a legal entity, such as a private limited company or public limited company, then you are not jointly and severally liable for debts. You are then not an entrepreneur for income tax purposes, but you are eligible for corporation tax.
What taxes do you have to deal with?
Most entrepreneurs have to deal with VAT and income or corporate tax.
The following is an overview of the three main taxes you may face as a business owner:
A. Income Tax
The sources of income for the income tax return for entrepreneurs are divided into three categories:
- Wage from employment
- Result from other work
- Profit from enterprise
Wage from employment
If you are required to follow the instructions of a client or if clients continue to pay you during vacations and illness, you are a fictitious employee. According to the tax authorities, this is employment income; your client must then pay employment taxes.
Results from other work
If your income does not fall under wages from employment or profit from business activities, these amounts are considered to be results from other work. In this case you may not make use of deductions such as the starter’s deduction and self-employed persons deduction.
Profit from business activities
Do you meet the requirements and are you an entrepreneur for the income tax? Then you can consider your income as profit from business. For most entrepreneurs, the income falls into this category.
B. Corporate Income Tax
As a natural person (sole proprietorship, partnership, etc.) you pay tax through the income tax, but as a legal person (eg, nv, foundation or association) you have to deal with the corporate tax. If you are an employee of this legal entity or you employ staff, you must report the company to the tax authorities as the party liable to withhold taxes. A payroll administration must then be set up.
C. Turnover tax (VAT)
Turnover tax or VAT is the amount of tax you charge on products and services offered. In many cases this is 21% on top of the amount on which you sell the goods or services, sometimes 9% and very occasionally 0%. In certain cases, goods or services are exempt from VAT. This can also apply to the entrepreneur when he/she remits little (or no) VAT.
Most entrepreneurs have to declare VAT. As soon as you have registered your company with the Chamber of Commerce, you will receive a letter from the tax authorities stating whether, how and when you must file a VAT return.
As of January 1, 2020, when you register your sole proprietorship in the Commercial Register of the Chamber of Commerce, you will receive two letters with two different VAT numbers.
- Turnover tax number: one letter contains your turnover tax number (VAT number). This is the old VAT number that is linked to your BSN (citizen service number). You use this number when communicating with the tax authorities and therefore also for your VAT returns.
- VAT identification number: the second letter contains your VAT identification number. You use this new VAT identification number on your invoices, quotations, website and for transactions within the EU. It doesn’t relate to your BSN so that it ensures better privacy.
Most important tax deductions
You may be eligible for tax deductions. The following deductions are available:
- Self-employed tax deduction
- Starters deduction
- SME profit deduction
- Investment deduction
- Co-working deduction
- Fiscal old age reserve (FOR)
- Random depreciation
Self-employed tax deduction
As an entrepreneur, you may claim the self-employed tax deduction, which means that the final amount on which you have to pay tax is considerably lower.
If you meet the hour criterion (1,225 hours worked as an entrepreneur in a calendar year, which is not reduced pro rata of you start during the year), you are allowed to deduct a fixed amount. The amount of the self-employed deduction will be phased out in the coming years. Till 2019 the deduction was € 7,280. In 2021, the self-employed tax deduction will be € 6,670. See the table below for an overview of the amounts per year.
2020: € 7.030
2021: € 6.670
2022: € 6.310
2023: € 5.950
2024: € 5.590
2025: € 5.230
2026: € 4.870
2027: € 4.510
2028: € 4.120
After 2028, the self-employment tax deduction decreases by € 110 each year, until the deduction is still € 3,240 in 2036. It may be that the government decides to reduce the deduction faster in the future.
If your profit is too low to use up the self-employed tax deduction in full, the tax authorities will deduct the rest of the amount in the next nine years.
For starting entrepreneurs, there is also the starter’s deduction, which is in addition to the self-employed tax deduction. Starters can deduct a total of three times an additional amount (€ 2,123) from their profits in the first five years of their business.
For this you must meet three conditions:
- You are entitled to the self-employed tax deduction
- In the five years prior to the relevant tax year, you have not used the self-employed tax deduction more than twice
- In the same period, you were not an entrepreneur for at least one year
SME profit exemption
The SME profit exemption applies to all entrepreneurs who make profits from their business. Since 2011 it is no longer necessary to meet the hour criterion of 1,225 hours to qualify for this scheme.But if you make a loss instead of a profit, the SME profit exemption has a negative impact. This is because the loss must also be reduced by the percentage of the SME profit exemption. This means you can offset less loss against your income. For 2020 and 2021, the exemption is set at 14% of the profit, after you have reduced it with the entrepreneurial deduction.
Anyone starting a new business must invest. Think for example of the purchase of a computer, printer or company car. To a certain extent, the tax authorities take into account the fact that you need to invest. If you have invested in business assets in a financial year, you may be entitled to the small scale investment deduction (KIA). This concerns entrepreneurs who have invested between € 2,401 and € 323,544 in business assets.
The KIA is a percentage of all investments, whereby the amount depends on the invested amount. Of course there are a number of conditions you must meet:
- Your company must be located in the Netherlands
- You are liable for income tax
- You have invested in certain business assets during this period
Do you have a tax partner who regularly helps you with your business? Then it may be that you are entitled to the so-called co-working deduction, which means you pay less tax on the final profit. The amount depends on the profit and the number of hours that your tax partner has worked in the company. There are also conditions to be able to use this scheme:
- You must meet the hour criterion
- Your tax partner works at least 525 hours per year in the business, with a maximum allowance of € 5,000
- Your tax partner may not be employed by you and no fictitious employment may be established by the tax authorities.
Fiscal Old-age Reserve (FOR)
Because you do not automatically build up a pension as a self-employed person, entrepreneurs may annually reserve a portion of the profit for their retirement provision. This reserved part is called the fiscal old-age reserve, often abbreviated to FOR. You do not have to pay tax on this amount immediately: you get a deferral of payment. The amount that you may set aside is subject to a maximum. In 2021 this is 9.44% of the profit, with a maximum amount of € 9,395. It is possible to convert part of your fiscal old age reserve into an annuity. The premium will then be tax deductible.
To be able to make a claim on the FOR you are obliged to put a minimum of 1,225 hours per year into the business. Also, you must not have reached the state pension age (in 2021: 66 years and 4 months) at the beginning of the relevant tax year.
Starting entrepreneurs can depreciate the purchase cost of assets ‘arbitrarily’. In other words: you decide how much you depreciate and when. This flexibility can have many advantages for starters. The regulation does not apply to all legal forms, but only to entrepreneurs with a sole proprietorship, general partnership (vof), limited partnership (cv) or partnership who are entitled to the starter’s deduction.
You may deduct business expenses from your income. Only the costs you make for the business interests of your company, are deductible. Business expenses are therefore the costs within reasonable limits necessary for the operation of your business and the costs that directly relate to your business. All other costs are not deductible. Business expenses you may encounter are for example:
- advice on the viability of your business
- registration in the trade register
- rental of business space
- stationery and other correspondence material
- furnishing of an office or workshop
- ecquipment, computer, laptop, materials
- telephone costs, both your business telephone and your calling costs.
- internet costs at your office (not at home, unless specially required)
- website design, hosting, online advertising
- maintenance and cleaning costs
- travel costs
- payments for work by fellow self-employed workers (also called: work by third parties)
- marketing costs for your company
- bookkeeping and external advisors
- courses, training, seminars and workshops
- professional literature
Business expenses can be deducted entirely from your revenues. Any reimbursements you received for the costs must be added to your revenues. Some expenses are both business and personal in nature. Of these mixed costs, only the business part is deductible. Costs you make in the start-up phase of your business can also be deductible.
When assessing whether costs are deductible, the motive with which you incurred costs applies. If it is clear that you have incurred the costs entirely for the business interests of your company, the costs are accepted as a deduction. As an entrepreneur, you are free to determine which costs you make for the company and how much. The tax authorities usually do not interfere, they don’t test your policy. Only if your costs compared to the business interests are very high, the tax authorities can intervene: they can then assess whether there is still a reasonable relationship between the two.
Deduct or spread expenses?
Some costs cannot be deducted directly from the profit in the year in which they are incurred, but must be spread over several years. You must therefore distinguish between:
- costs that you may deduct in full in the year to which they relate
- costs which are seen as an investment which must be depreciated over a number of years
Deducting expenses with or without VAT?
If you have expenses for your business, the supplier often charges you VAT. Usually you can recover this VAT (the so-called input tax deduction). In that case, you deduct the costs excluding VAT when calculating your profit. Sometimes you cannot deduct the VAT. Then you may deduct the costs including VAT when calculating the profit.
Make sure you have an invoice
You need an invoice (receipt) of the expense to account for the costs. Make sure the invoice clearly states the date, invoice amount, invoice number, company name of supplier, VAT amount and nature of the goods or services provided. For hospitality expenses, simpler requirements apply. At least the date of issue, name of the catering establishment and description of the food and drink consumed.
For VAT purposes, amounts over € 100 must be paid in the company name. Pay these via your business bank account. The more it is plausible that you have made these expenses in the context of your business. That you have not found a receipt on the street somewhere and put it in your books to have fewer costs and therefore pay less tax.
Business deductible expenses: start-up costs
Costs incurred before you registered with the Chamber of Commerce may be included up to five years ago as start-up costs. You do this in your income tax return in the year in which you start registering with the Chamber of Commerce. For example, if you started in 2018, you may deduct the (business) expenses as of January 1, 2014. Some examples of start-up costs are:
- travel expenses and mileage claims (if you have been on the road with your private car for your start-up company, then you may deduct € 0.19 cents per km as business expenses).
- lunch/dinners (with relation/client) (limited deduction)
- telephone costs
- printing (business cards)
- study costs/courses
- legal advice costs/notary public
You must be able to demonstrate that you have actually incurred the costs. You must be able to do this by means of invoices or a mileage administration with a calendar in which the appointments are made. In addition, you must be able to justify the relationship between the costs and your business. So you have to be able to make a good case that the expense is in the interest of your company. Also think about VAT. If you are an entrepreneur for VAT, you may deduct the VAT charged on your business expenses in your VAT return.
It may be that you have first bought goods privately, for example a laptop, and then later use them for business purposes. You process this as follows. At the start of your business the goods (above € 450 excluding VAT) may be placed on the balance sheet. You depreciate these investments in 5 or 10 years (so not immediately in the year of purchase as costs). This is a statutory period. More information on depreciation follows later in this article.
Expenses of material goods under € 450 excluding VAT are small purchases and may be deducted from the profit in the year of purchase. Make sure you keep all receipts.
Limited deductible expenses
It may be that you incur costs from a business perspective, but which contain a private element. This is because you yourself or someone else has personal benefit from it. These are called mixed costs. In that case, only the business part is deductible. Think of telephone and internet costs at home. Note that for both the income tax return and the VAT return, there are limited deductible expenses for a portion of private use. For the VAT return, you correct the private use portion in the last VAT return of the year (often for the fourth quarter).
Catering costs, such as a business lunch or business dinner with a business contact, are limited deductible for income tax. For VAT purposes, hospitality costs are generally not deductible. Despite the fact that there is certainly a business interest, the tax authorities believe that there is also a private element. You save yourself and your customer a meal. Because of this, it has been determined by law that (from 2017) catering costs are 80% deductible for income tax. So you may not deduct 20% and process it as a private expense in your records. There is also a threshold amount that is often only relevant for larger companies and not for self-employed individuals.
For VAT, catering costs, if consumed in the catering establishment, are not deductible. This means that the VAT on catering expenses that you consume in a catering establishment is not deductible entirety. However, you may include this as a business expense for income tax purposes and deduct 80% of the total amount (including VAT) on your income tax return. The VAT on catering costs is deductible if you eat lunch or dinner at the accommodation of your own company. Think for example of a dinner from the Chinese takeaway or sandwiches from a catering company.
Costs that serve no business purpose (private costs), can’t be deducted for income tax. In addition, there are a number of costs which are explicitly stated as not deductible:
- So-called ‘expenses to maintain a certain personal financial position’. For example, the purchase of a tailored suit for special representative occasions. Even if you wear it for business reasons, it is not deductible for income tax.
- Fines (such as from the tax authorities, traffic fines).
- Personal care (unless you are an artist).
The non-deductible expenses must be processed in the accounts as private expenses.
Workspace at home
Do you, as a self-employed person, use a workspace at home? Then a number of costs are deductible under certain conditions. This has to do with the question whether there is an independent workspace or not. And there is a requirement regarding the earnings. Only if you meet these requirements, you may deduct costs.
The costs of furnishing the office are in line with the costs of the office itself. If the costs of the office in the home are not deductible, then this also applies to its furnishings, such as the desk, the lamps and the cabinet in the living room. Also consider the possibility of investment deduction.
Whether there is an independent workspace is considered whether you could rent it to any third party. For this, it is necessary that the office has its own entrance and private plumbing. Since 2017, this also applies to work rooms in a rental property.
There is also a requirement that you earn more than 70% of your profit in or from the workspace and 30% of the profit must be attributable to working in the workspace. If you rent another workspace elsewhere, the requirement is that at least 70% of your income must be earned in the workspace at home. Only under these conditions may you deduct the costs for the workspace itself and its furnishings. Since 2017, this also applies to workrooms in a rental home.
The deduction for a owner-occupied home is equal to the benefit that you must attribute to the work room in Box 3 and, as of 2017, therefore depends on your assets. For a rental property, a proportionate part of the rent is deductible. You may also include any service charges. Please note that you must make a one-time decision whether to allocate private or business assets, i.e. in the year you start or in the year you purchase/first rent the property.
Work clothes are clothes that you can wear (almost) exclusively in the context of your business. This must be evident from the appearance of the clothing (for example: a uniform or overall). Then the clothing is fully business deductible for both VAT and income tax.
Is the clothing also suitable for use outside your company? Then the clothing must have a logo with a minimum area of 70 cm2. The logo must refer to your company. Does the clothing not meet these conditions? Then unfortunately it is not deductible for both income tax and VAT.
Accommodation expenses such as hotel stays are fully deductible for both income tax and VAT. These are only the accommodation costs. Not the hospitality costs such as breakfast, coffee and tea, etc. These are again limited deductible.
Boats for representative purposes
The purchase of a boat (sloop or yacht) for representative purposes is not deductible for both VAT and income tax. Unless you are a rental company of sloops or yachts. Renting a boat is also not deductible. Unless you place advertising of your own business on the boat. Then it may be deductible.
Business travel with your private car is deductible at 0.19 cents per kilometer. You book this as a deductible business expense and as a private deposit. To demonstrate that you have made the mileage, you must keep a diary and mileage summary. In addition, a note with the reason why it was a business trip. Other travel costs such as those incurred on public transport or your own bicycle are also deductible.
You can also choose to have a company car. This means that you have bought the car for business purposes or have brought it from your private life into your company. Then you may deduct the costs. Do you drive 500 kilometers or more in a year privately? Then you will have to take into account an addition for private use. This is for both income tax and VAT.
Investment or business expenses
Business expenses can be divided into costs or investments.
Investments are business expenses for material goods above € 450 excluding VAT, which last for several years. Think of a laptop, car, etc. These goods come on the balance sheet for your income tax return (annual tax return). Under tangible fixed assets. Also at the start of your company where you first bought the goods privately and at the start of your company bring them into the business, the goods may be placed on the balance sheet.
On these investments (movable property) you then write off in 5 or 10 years (so not immediately in the year of purchase as costs). This is a statutory period. You can take into account a residual value. But many products are already obsolete by that time so you can fully depreciate them. Think of a laptop, after 5 years it is usually not worth much more.
Note that if you are a starter you may also use random depreciation. You may then depreciate certain investments in one time. This can result in a tax advantage. How much and whether it is useful to do so depends on the rest of the income tax return.
Expenses of material goods under € 450 excl. VAT are small purchases and may be deducted from the profit in the year of purchase. These come on the profit and loss account of the relevant financial year (year of declaration income tax). Also consider the possibility of investment deduction. This can provide a nice tax benefit.
Investment and also partly private use
It may happen that you purchase goods that you will use partly for business and partly for private purposes. Think for example of your car. Do you put that on the business or in private? The main rule is as follows. For more than 90% business use, it must be booked as business (for both VAT and income tax). For less than 10% business use, it must be booked privately (for both VAT and income tax).
Mixed use, optional capital
That in itself is clear. But with mixed use, of more than 10% business use and less than 90% business use, you then have the choice, when you purchase the goods, of including them entirely in your business assets or entirely in your private assets. This applies to both income tax and VAT (sales tax). For example, you can book a car for income tax purposes privately and for VAT purposes professionally. In summary, for both income tax and sales tax, you have three choices, you count the goods
- entirely to your private assets (the VAT and the costs for the income tax are not deductible)
- partly to your private assets and partly to your business assets (the VAT and the costs for the income tax are only deductible for the business part)
- entirely to your business assets (all VAT is deductible, on the last return of the year you declare the VAT on private use, the costs are otherwise deductible for income tax).
The private use is determined on the basis of actual use. For the VAT, you correct this in the last VAT return of the year. Usually that is the VAT return for the fourth quarter.
In which period are the costs booked?
Generally speaking you will receive most invoices of expenses over the same period as the invoice date. But some expenses relate to a different period than when you receive the invoice. How do you handle that?
You book income tax expenses in the period they relate to. So if the costs for the bookkeeper’s income tax return relate to the previous year, then you book them as costs in the previous year. Do you not receive and pay the invoice until the following year? Then the costs will still be booked in the previous year. They will then appear on the balance sheet as expenses still to be paid. But beware. For VAT, it goes differently. The VAT mentioned on the invoice is booked in the period of the invoice date. Over that period you also book the VAT.
How to calculate your taxable profit
Below is an example of how you can determine the taxable profit, based on the business profit that you have calculated and the additions and deductions. Then you can use the taxable profit to determine the tax payable.
Fiscal Year 2021 (example)
Turnover (€ 100,000)
- Minus: Business expenses (€ 45,000)
= Business profit (€ 55,000)
- Plus: Non-deductible portion of costs
- Plus: Additional charge for use of company car
- Plus: Private use of services/goods from the business
- Minus: Small scale investment deduction
- Minus: Random depreciation
= Profit for the fiscal old age reserve
- Minus: Addition FOR
= Profit after FOR
- Minus: Self-employed deduction (€ 6,670)
- Minus: Starters deduction (€ 2,123)
= Taxable profit (€ 46,207)
- Minus 14% SME Profit exemption (€ 6,469)
= Taxable profit (€ 39,738)
Income tax (37,10%) € 14,743 (up to € 68,508 37.10%; from € 68,508 49.50%)
Healthcare € 2,285 (5,75% on a maximum profit of € 58.311)
Income tax is further reduced with the general tax credits.
Then there are the tax credits. These are not deductions, but direct discounts on the amount of tax you have to pay. There is the general tax credit, which everyone can get up to a certain taxable income from work and home. But there is also the employment tax credit, a tax benefit for anyone with an income from employment, profit from business or results from other activities. The tax credit is income-related.
When do I have to pay income tax?
In principle, just as when you work as an employee, you must submit your income tax return by May 1 each year. But as a self-employed person, you can also request a deferral, just like employees. In that case, you should request the deferral before May 1. Expatax makes use of the deferral arrangement for tax advisors, whereby a standard deferral of 1 year applies.
Note: If you apply for a postponement, it will take longer before you receive the final assessment. This means that you will have to set an amount aside for a longer period of time and may have to pay (more) tax interest.
Provisional income tax assessment
In principle, you will receive a provisional assessment of income tax for entrepreneurs at the beginning of the calendar year. Didn’t you receive one? Then you can ask the tax authorities for one. Do this especially if you expect to pay a considerable amount of income tax. You can pay the amount in 1 time with a small payment discount or in installments.
To make sure you can always pay your taxes (both your VAT and your income tax) we advise you to set aside at least 30% of each sales invoice (i.e. that you send to your customers). In general you will then always have enough to pay your taxes.
Fluctuating income: averaging arrangement
If you are self-employed you may have a fluctuating income. This is actually quite normal, but sometimes difficult with a view to your tax return. It can then be advantageous to make use of the averaging scheme. You take the income from three consecutive years and add them together, then divide that amount by three and you have your average income over three years. You then calculate the tax over those three years and compare it to the tax actually paid. The difference can, reduced with a threshold, be claimed back from the tax authorities.
Income-related contribution health insurance
In addition to your monthly premium for health insurance, you also pay an income-related healthcare insurance contribution of 5.45% in 2020 and 5.75% in 2021. The healthcare insurance contribution is calculated over the taxable profit of your company. The taxable profit is calculated in the following way: Profit from business – self-employed tax deduction – starter’s tax deduction – SME profit exemption = taxable profit.
The income-related healthcare insurance contribution is paid by your employer if you are employed. As a self-employed person, you pay the income-related health insurance contribution yourself. You will receive an assessment for this from the tax authorities.
Stop worrying about your administration!
Let expatax help your with your bookkeeping and tax obligations.