Lump sum expenditure is a concept that most of business owners hear about and get intrigued. However, many people are unaware of what this term means or confuse it with other similarly sounding terms. In this article, as a part of our “Starting a business” series, we are explaining lump sum expenses for all sole proprietors.
Lump sum expenses or expenses via income percentage (often referred to as 60/40 rule) are de facto legal fictitious expenses. According to Czech law, a sole trader can apply this method of recording expenditure in their yearly tax declaration. In other words, entrepreneurs can lower their income by 30 to 80%, even if they did not have any in the given year. Those 30 to 80% (unlike an employee) are excluded from income tax. For many people it means a legal tax benefit.
Example
Ann is a sole trader and in 2019 she made 320 000 CZK. She has actual expenses that come with running a business like software, hardware, calls for a sum of 80 000 CZK. Her tax base will be then 320 000 CZK – 80 000 CZK = 240 000 CZK. This sum will be the base to calculating her yearly income tax.
In other case
Ann decides to apply lump sum expenses method for her 2019 declaration. From 320 000 CZK she will deduct 60% as expenses, which is 192 000 CZK. Her tax base then will be 320 000 CZK – 192 000 CZK = 128 000 CZK. This sum will be the base to calculating her yearly income tax. We can see that with this method the income tax would be significantly lower than with the actual expenses.
How many percent can you deduct?
Percentage of lump sum expenditure varies according to the type of revenue.
- 80% of income from agricultural production, forestry and water management and income from craft trades. You can apply these expenses up to an amount of 1 600 000 CZK.
- 60% of income from all trades besides craft. Cap on those is at 1 200 000 CZK. Meaning your income for these method cannot be higher than 2M CZK.
- 40% of income from other business under special regulations, income from the use or provision of industrial or other intellectual property rights, copyright, including rights related to copyright, including income from production, reproduction and distribution of literary and other works at own expense. You can apply these expenses up to an amount of 800 000 CZK.
- 30% of income from lease of assets classified as commercial. Here the cap is 600 000 CZK.
Several income streams
In case you have more types of income that fall under different percentages of lump sum expenses, you have to register individual income separately. In the tax return you apply the respective percentage to each income. However, it is not possible to combine actual expenses with lump sum for different incomes. That is, if you claim a lump sum of 80% from the profits of a craft activity, then you can no longer apply actual expenses to the free trade income and you must also apply a 60% expense.
Who benefits from lump sum expenses?
Entrepreneur that has no actual expenses, more often means a person working in supplying intangible services, like marketers, journalists, artists etc. In this case your business expenses might be very low and therefore your income tax can be in high numbers. Also, tax agenda with lump sum expenses is more affordable and can be done once at the end of the year.
Who benefits from recording actual expenses?
Entrepreneurs, whose actual expenses are more than their lump sum expense amount, ones that have high income and need to lower it effectively. Also those for whom accounting expense won’t be a big burden: those who would rather pay the accountant to save on their taxes).