Full Deduction of Costs for Entertaining Freelancers

Normally, a business person may deduct for entertainment 70% of the expenses as operational costs. However, as the Finanzgericht Rhineland-Palatinate (re 1 K 1962/05). shows again there is no rule without an exception.

Generally, all costs related to your business are deductible (§4 I EStG). However, §4 V 1 no. 2 EStG sets an exception to the rule of general deductibility of all operational costs. The cutting of the operational costs only concerns the entertaining for general business interests ("aus geschäftlichem Anlaß"). Costs for "wining and dining" for operational reasons ("betriebliche Zwecke") are always deductible in full. That is the case, for example, when an employer feeds his staff members during a company event or sponsors a continuing education event for an employee, freelancers, it is recommended to enclose the schedule of the event with the receipts and to refer to this judgment of Rhineland-Palatinate tax court. Only following these suggestions, will you be able to prove general operational interest during tax or other company audits years later.

The judges of the tax court Rhineland-Palatinate had to decide whether such expenses for freelancers ("freie Mitarbeiter"), that is costs to attend internal training-events can be deducted in full or not. The answer to this frequently and controversially discussed question is: "Yes." Provided, however, that the topics on the schedule at the event are exclusively on in-house matters. But if the main purpose is to sell merchandise to the freelancers, the commercial aspect takes precedence. The consequence is the lessening of these deductions by 30%;

Hint:

Whenever planning an event of general operational interest for freelancers, it is recommended to enclose the schedule of the event with the receipts and to refer to this judgment of Rhineland-Palatinate tax court. Only following these suggestions, will you be able to prove general operational interest during tax or other company audits years later.