Expenses after leaving the business
Expenses after leaving the business
January 2022 – Just as your income may still be taxable long after you have ceased your activity, your expenses may also remain deductible after you have ceased your activity. The Ghent Court of Appeal was called upon to rule on a whole series of costs and expenses that were still incurred after the cessation of activity. A particularly interesting case!
Facts
A couple operated a shop from 1 January 1998 until mid-March 2012. The couple was taxed according to the flat rate scheme for general food retailers. Even in the last year of their self-employed activity (2012), the gross profit was determined on a flat-rate basis and then reduced by expenses. In 2012, however, these costs are higher than the gross profit, but the administration refuses to deduct them as they exceed the gross profit. The administration therefore reduces the loss to zero.
As the court disagrees, the administration revises its position and rejects all costs incurred after the shop is closed, as there is no longer any taxable income. The law stipulates that expenses are only tax deductible if the expense was made or borne with a view to acquiring or retaining taxable income..., which is difficult to defend after the business has ceased.
Expenses in one year, paid the next
But according to the Ghent Court of Appeal, the fact that certain expenses were incurred after the cessation of activity does not necessarily mean that these expenses must also be incurred in the year in which the income to which they relate was obtained. It is not necessary for these expenses to generate actual taxable income in the taxable period in which they were incurred. According to the Court, expenses that were necessary due to a former professional activity, but which are only incurred after the cessation of that activity, are indeed deductible as professional expenses for the trader.
What costs?
Rent: the self-employed entrepreneur still rented the building for 9 months in 2012, while the shop closed in April 2012. According to the tax authorities, the entrepreneur did not make any effort to limit these costs, nor can he prove that the rental was necessary after the cessation of activity in order to still generate or maintain income. The tax authorities were therefore only prepared to accept the rental charges for the first four months.
The Court did not follow the administration in its reasoning. The lease of a business property cannot be terminated immediately after the shop is closed. The shop has been in operation for 13 years and it is therefore very likely that it will take some time to vacate the business premises after the shop has closed. A period of five months seems reasonable to be able to clear an operational building after all this time and to put it in order. There was no residential function and there is no evidence that this was an excessive burden.
Deduction? YES!
Fire insurance: the tax authorities intend to refuse the deduction of premiums for the period after the cessation of activity.
The Court notes that the insurance premium was paid in the first half of 2012 and covers a full year. The reasoning of the tax authorities is that after the cessation of business and the evacuation of the building, the entrepreneur should have claimed a refund of part of the premium from the insurance company, which the latter would probably not have accepted.
Deduction? YES!
The contractor also owned a building which he also used for his business purposes. The fire insurance for this building was accepted, but only until the end of September, as this was, according to the Court, the time when the business operation ceased. The building was then used for private purposes by the former contractor and the fire insurance premium also became a private expense.
Electric insect killer: In May 2012, the contractor rented a professional fly killer for one year. The invoice dates entirely from after the cessation, so that the taxman disallows the expense.
But the court once again takes a different view. The professional insect killer was still needed to settle the cessation of activity. And even if its rental goes beyond what was strictly necessary, it is established that the entrepreneur, at the time he committed himself, made and bore this expense in order to properly wind up his professional activity. The Court is of the opinion that the former contractor cannot be expected to claim reimbursement of the rental for the period during which he did not use the equipment, insofar as this was possible.
Deduction? YES!
Surveillance of warehouses, convenience store and private property: here too, the taxman rejects in full the invoice from a security company dated 4 June 2012. This invoice related to the surveillance of the business for the period from June 2012 to May 2013. The Court considers the charge as professional until the end of the lease of the business premises, i.e. until the end of September 2012.
After that date, it is the protection of the appellants' private (adjacent) property.
Deduction? The Court rejects 9/12ths of the expense as a business expense.
Electricity: the administration rejects this expense as very high.
The Court describes this reasoning as a "judgment of expediency", which is not allowed. The taxpayer also proved that the bills had risen sharply during the period in question.
Deduction? YES!
Withholding tax on real estate: in a commercial lease, the lessee often has to pay withholding tax on real estate (which is not allowed in a private lease). The former contractor had to pay the withholding tax for a full year, although he only occupied the building until September 2012.
The court described the property tax burden for the period after the cessation of activity as a "lost burden". It did not actually bring in anything, but it had to be made and borne for the purpose of carrying on the professional activity.
Deduction? YES!
What can you learn from this?
Expenses you incur in connection with the cessation of an activity or the settlement of this cessation remain deductible.
Expenses that you incurred before the cessation, but which no longer benefit you after the cessation - the Court speaks of lost expenses - are also fully deductible.