What expenses in Georgia are related to business activity, and which are not? Let's figure it out with REVERA Georgia lawyers

24.12.2024

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The main provisions of the Tax Code of Georgia regarding the distinction between expenses related to entrepreneurial activity and expenses not related to entrepreneurial activity for tax purposes are contained in Part 1 of Article 97.

Taxation of business expenses in Georgia

According to Article 97 of the Tax Code of Georgia, a resident enterprise is subject to profit tax on expenses or payments that are not related to economic activity. Specifically, in order for an expense to be deductible as a business expense, it must be related to the enterprise's main business activity.

What are business expenses?

A business expense is anything that is spent or paid to perform work or produce products in the context of running a business. This includes:

• Personnel costs: equipment, etc.
• Outsourcing services: 
• Software: 
• Rent and Utilities: 
• Stationery and equipment: 
• Insurance and administrative fees: 
• Marketing and advertising expenses: 
• Debt repayment: Payments related to loans and credits.

Challenges in determining business and personal expenses

It can be difficult to determine whether some expenses are business-related or personal. For example:

• Coffee or meals: small purchases, such as getting coffee during the workday, cannot be considered a business expense unless they are directly related to business activities, such as meeting with a client or working at a coffee shop.
   
• Home office supplies: if you use a home office exclusively for business, the cost of furniture and supplies can be considered a business expense.
   
• Fuel expenses: fuel is a valid business expense if it is used for business travel, such as meeting clients. However, travel between home and your regular workplace is generally not considered a business expense.
   
• Unauthorized expenses: any transaction made by a company that is not accompanied by a document confirming the relevant expense is subject to a 15% tax on profits. Accordingly, it is recommended that these unnecessary expenses be avoided by having proper documentation.
   
• Representation expenses: It is also very important to take into account that the tax code of Georgia limits the deduction of representation expenses and they should not exceed 1% of the income received by the company during the previous year, and in the case when the company was at a loss and the expenses of the previous year exceeded the total income, then the representation expenses should not exceed 1% of the amount of the expenses of the previous year. If the company incurs representation expenses in the very first year of its establishment and accordingly there is no total income or expenses for the previous year, in such a case the representation expenses should not exceed 1% of the total expenses of the current year.

Using GPS trackers for business travel

When a vehicle is used for both business and personal purposes, a business can use a GPS tracker to distinguish between personal and business use. By tracking distance and determining when a vehicle was used for business-related travel (for example, to meet a client), the business can accurately calculate and allocate expenses related to business activities.

Real estate and employee accommodation

The purchase of real estate for employee housing may also be considered a business expense, but only if the purchase is deemed necessary for business operations, such as improving employee efficiency. For example, if the property is used as shared housing for staff or space for business operations, it may be classified as a legitimate business expense.

Conclusion

Separating personal and business expenses is crucial for businesses, especially for tax purposes. Business owners must be diligent in ensuring that only those expenses that are directly related to their business activities are considered/deducted as business expenses. While some expenses are easy to qualify, others - such as small everyday purchases or mixed-use assets - require detailed analysis and distinction to ensure proper tax compliance.

Authors: Iashagyan Oksana, Svanidze Melano

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