Telephone
Partial deductibility for landlines and mobiles used in the business, at a percentage set by law.
VAT numbers · Costs
Deductible car and business expenses
There is only one rule: the cost must relate to the business. Everything else is a set of quantitative limits that the law has placed exactly where that link is hardest to prove.
01 · The principle
What "inerenza" (the business link) means
A cost is deductible if it is inerente to the business: that is, if it relates to goods and services used in carrying on the business or profession. It does not have to produce direct revenue, but there must be a connection with the activity.
Alongside this link, two other requirements apply: accrual, which establishes the financial year the cost belongs to, and documentation, which proves it.
- The cost must be documented by an invoice, receipt or other suitable document made out to the business.
- It must be traceable where the rules require it, in particular for meals and accommodation.
- It must be recorded in the accounts according to the applicable regime.
- It must respect the quantitative limits set for certain categories.
- For professionals the cash basis applies: what counts is the payment. For businesses keeping ordinary accounts, the accrual basis applies.
If you are under the regime forfettario (the flat-rate scheme) you do not deduct any cost item by item: income is calculated by applying to revenue the profitability coefficient for your codice ATECO (the Italian business activity code). This is what makes the flat-rate scheme a poor fit for people with high costs.
02 · The most debated case
Deducting a car as a business expense
This is the item with the strictest limits, because a vehicle lends itself to mixed business and private use. The rules set a deductible percentage and a cap on the purchase cost.
- The cap on the purchase cost is set as a fixed amount: the excess does not count, and on an expensive car the actual deduction is a small fraction.
- The same cap applies to leasing and rental, with their own parameters.
- Running costs (fuel, maintenance, insurance, road tax, tolls) follow the same percentage as the vehicle.
- VAT on the purchase and on the running costs has its own recovery rules, which do not match the deductibility of the cost.
- Fuel must be paid by traceable means for it to be deductible and for the VAT to be recovered.
| Situation | Deductibility |
|---|---|
| Vehicle essential to the business's own core activity | In full |
| Vehicle for public use | In full |
| Company vehicle for mixed use | Partial, with a cap on the cost |
| A professional's vehicle | Partial, with a cap on the cost and on one vehicle only |
| Vehicle provided to an employee for mixed use | A higher percentage, with the fringe benefit taxed |
| Sales agents and representatives | A more favourable percentage, with a higher cap |
The "essential to the core activity" case is narrower than people think: it covers vehicles without which the business could not operate at all, as for driving schools or rental companies. Using a car a lot for work is not enough.
03 · Meals and accommodation
Business trips, meals and hotels
The rules distinguish between expenses incurred on a business trip and expenses incurred in the Comune (municipality) where the business is carried on, and between businesses and professionals.
Professionals
Meal and accommodation costs are partly deductible, compared with the cost incurred, within a percentage limit of the year's fees.
Businesses
Meal and accommodation costs are partly deductible; those for employees' business trips follow separate daily limits for Italy and abroad.
Expenses recharged to the client
If documented and recharged item by item on the invoice, they are treated more favourably.
Traceability
Payment by traceable means is a condition for deducting business trip expenses.
What to keep
Documentation makes the difference in a tax inspection.
- An invoice made out to the business, not a generic till receipt
- The name of the client or the reason for the trip
- Proof of traceable payment
- Expense claims for trips by employees and collaborators
04 · The rest
Other recurring items
These are the expenses that appear in almost every set of accounts, and each has its own rules.
Property with mixed use
If you work from your own home, you deduct a share of the costs, under precise conditions and to a reduced extent.
Capital goods
They are deducted through depreciation; below a certain unit cost, full deduction in the year is allowed.
Training and professional development
For professionals, compulsory training and professional development have dedicated rules, with their own limits.
Entertainment expenses
Deductible within a percentage of revenue, provided they relate to the business and are reasonable for it.
Gifts
Fully deductible below a unit value threshold; above it, they count as entertainment expenses.
05 · Recovery
VAT follows its own rules
Deducting a cost and recovering its VAT are two separate things: a cost can be partly deductible with its VAT fully recoverable, and vice versa.
- VAT on vehicles has its own recoverable percentage, higher where exclusive business use can be proved.
- VAT on meals and accommodation is recoverable if the expense relates to the business and is documented by an invoice, not a till receipt.
- VAT on entertainment expenses cannot be recovered, except for gifts below the threshold.
- VAT on telephone costs follows the percentage of business use.
- The pro rata rule limits recovery for those who also carry out exempt transactions.
- Under the flat-rate scheme VAT is never recoverable: it is a cost in every respect.
Always asking for an invoice rather than a till receipt is the first practical rule: without an invoice the VAT cannot be recovered, and for some items even the cost cannot be properly documented.
06 · What not to do
The mistakes that come out in tax checks
They are recurring and predictable, and almost all of them can be avoided with the right set-up from the start.
- Personal costs deducted as business costs: this is the most frequent objection and the hardest to defend.
- Documents not made out to the business, or made out to the individual with no link to the activity.
- Cash payments where the rules require traceability.
- Applying the wrong percentage to vehicles, often by assuming they are essential to the business.
- Deducting capital goods in full above the threshold, instead of depreciating them.
- Entertainment expenses classed as advertising to get round their limits.
The difference between advertising and entertainment lies in the purpose: advertising promotes a product to the public at large, entertainment looks after relationships with specific people. Reclassifying for convenience is one of the most common approaches and one of the most frequently challenged.
Frequently asked
The questions that keep coming up
Can I deduct my car if I also use it privately?
Yes, but only in part and with a cap on the purchase cost that counts. This is exactly the situation the rules deal with through reduced deductibility.
Full deduction is reserved for vehicles essential to the business's own core activity, meaning those without which the business could not be carried on. Using it a lot for work is not enough.
I work from home. Can I deduct rent and utilities?
In part. For a property used for both home and work, a share of the costs can be deducted, to a reduced extent and under precise conditions, which differ for professionals and businesses.
The deductible share is modest and must be documented. If part of your home is used exclusively for the business, the treatment is different, but the use has to be objective and provable.
Is lunch with a client deductible?
In part, within a percentage limit calculated on the year's fees or revenue, and provided the payment is traceable and the expense is documented by an invoice.
If the expense is recharged item by item to the client on the invoice, the treatment is more favourable. Keeping a note of the client and the reason helps a great deal in an inspection.
I am on the flat-rate scheme. Why can I not deduct anything?
Because the flat-rate scheme calculates income by applying to revenue a profitability coefficient set by ATECO code: costs are treated as already reflected in that coefficient.
This is why the flat-rate scheme suits people with few costs. Those with many often find the ordinary regime more advantageous, as explained in when the flat-rate scheme is worth it.
Let's talk
A cost deducted wrongly is not a saving, it is money set aside
Sooner or later it comes back with penalties and interest. Better to set up the accounts properly from the first year.