What are financial expenses and how to deduct them as a self-employed
Patrick Gordinne Perez2024-12-28T00:27:42+00:00Financial expenses are those that arise from the use of external resources to finance the activities of a business or venture. As a self-employed person, understanding what these expenses are and how to deduct them can help you to significantly reduce your tax burden.
What are financial charges?
Financial expenses refer to all those costs that are incurred when using financial products or services for the development of economic activity.
In other words, they are the costs related to loans, credits, bank interest, account management fees and other services that banksor other institutions charge for providing financing or financial services.
As a self-employed person, it is often necessary to seek external financing to carry out projects, cover unexpected expenses or invest in business growth, it is important to understand how these financial expenses impact on the cash flow of the business and how they can be used to reduce the tax base when calculating taxes.
Types of deductible financial expenses
There are several types of financial expenses that are considered deductible for a self-employed person, as long as they are directly related to the economic activity you carry out.
Interest on loans and credits:
Interest paid on loans obtained to finance business activities is deductible, provided that it can be justified that the loan was used entirely for the business activity.
Bank charges:
Fees charged by banks for the management of bank accounts linked to the business are deductible.
This includes fees for account maintenance, transfers and other services related to the financial operations of the business.
Bill discounting charges:
If you use a bill discounting service (such as bill discounting), the interest and fees you pay to the financial institution can also be deducted.
Leasing expenses:
If you have acquired an asset through financial leasing, the interest paid and associated expenses will also be deductible.
Exchange rate differences:
In case of trading in foreign currencies, exchange differences that generate financial losses can also be deducted as financial expenses.
Requirements for the deduction of financial expenses
In order for financial expenses to be deductible, they must meet certain requirements established by tax regulations.
These requirements ensure that the expenses are actually linked to the self-employed person’s economic activity and not to their personal sphere.
- Link to the economic activity: The expenses must be clearly related to the activity you carry out as a self-employed person. For example, a personal loan cannot be deducted unless you can prove that the money was used for the professional activity.
- Documentary justification: All financial expenses must be supported by invoices, bank receipts or statements justifying their nature. This includes bank invoices, statements showing fees or interest paid, and any other documents that can be used as proof.
- Bookkeeping: You need to keep proper records of financial expenses in your accounts. These should be recorded clearly and separately, so that they are identifiable for tax purposes.
How to deduct financial expenses on your tax return
The deduction of financial expenses is made when filing the income tax return, in the section corresponding to the expenses associated with the economic activity.
In general, you should use form 130 or form 131 to declare the quarterly instalments and then consolidate the income and expenses in the annual tax return.
To deduct financial expenses, you must include them in the income and expenditure book, where they must be clearly detailed and linked to the business.
Each quarter, you must include financial expenses within the deductible expenses that are presented in the IRPF liquidation through form 130 or 131.
When filing your annual income tax return, you must ensure that all financial expenses recorded in the accounting ledger are properly reflected in the deductible business expenses.
Tips on how to optimise the deduction of financial costs
Separate personal and business accounts:
Use separate bank accounts for your professional activity and for your personal expenses.
This will ensure that all bank transactions are clearly related to the business and you will be able to better justify financial expenses.
Apply for loans in the name of the business:
If you need financing, try to apply for loans in the name of the activity or business, and not as a personal loan.
This will make it easier to justify and deduct.
Keep documentation organised:
It is important to have all documents supporting your financial expenses in an orderly and accessible manner.
This will not only make it easier to file your tax return, but will also allow you to be prepared in case of a possible tax audit.
Consult a tax advisor:
Every financial situation is unique, and having a tax advisor can be the best way to make sure you are deducting all possible financial expenses, while respecting current regulations.
Common mistakes when deducting financial expenses
When it comes to deducting financial expenses, it is common to make certain mistakes that can have negative consequences for your self-employed activity.
Some of the most common mistakes are not properly justifying expenses, including those that are not well documented or that are not directly related to the professional activity.
This can lead to the tax office refusing the deduction of such expenses.
Another common mistake is to deduct personal loans without proving that the money was used for the business.
It is essential to use specific financing for the business activity and to have all supporting documentation.
In addition, the lack of a clear and detailed accounting record can make it difficult to identify financial expenses at tax time, which could result in errors that negatively affect your deductions.
At Asesoría Orihuela Costa we are specialists in accounting advice for the self-employed, contact our team and ensure the financial health of your business.