Business justification of expenses

Expenses such as travel costs, food costs, or accommodation costs can be deducted from a company's revenue. However, for these to have a tax-free effect, they must be justified on business grounds. Otherwise, they are added to the profit. The burden of proof for this evidence lies with the taxpayer.

Expenses are outlays such as travel costs, food costs, or accommodation costs that are incurred in the performance of work activities. Many companies have an expenses regulation approved by the canton in which they are based, which allows for lump sum expenses without proof. However, if there is no expenses regulation, the expenditures must be precisely documented. The burden of proof that these are also justified on business grounds lies with the taxpayer. In particular, for representative expenses such as consumption costs in restaurants, the business connection must be demonstrated, as otherwise it is assumed to be private consumption. If the business link is missing, the expenses are not tax-free but are added to the profit in the case of companies.

This proved disastrous for a stock corporation from the canton of Bern, whose case (2C_52/2018) ended up at the Federal Court. In the tax periods 2010 and 2011, the regular restaurant visits of the two shareholders of the company were booked as expenses. They visited certain locals almost weekly, with the most popular spot being visited 39 times in 2010 and even 49 times in 2011. Due to expenses not justified on business grounds or not documented, part of the expenses was then added to the taxable profit by the tax administration of the canton of Bern. After unsuccessful appeals to the tax appeal commission, all expenses were added to the profit. The company did not accept this and took the case all the way to the Federal Court.

But here too, the complaint was dismissed. In principle, the claimed costs could be deducted from the taxable profit if they were justified on business grounds, i.e., indirectly or directly serve the business or entrepreneurial purpose of the company. However, the company could not provide any proof for this. The restaurant visits were claimed for customer acquisition, but this was rejected by the Federal Court, particularly as the visits sometimes fell on statutory holidays or the birthdays of shareholders (and their partners), and wines and champagne of the upper price segment were consumed. The appealing company also argued with a ruling of the tax authority, which was granted to it in 2007 and had been binding from 2009 onwards. However, this was of no use, as it only concerned the allocation between private and business shares in business-justified restaurant expenses. In the present case, these had no business connection.

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