Deductible Expenses Simulator

What makes an expense deductible

For business activities under direct assessment, the IRPF rules largely refer to those of Corporation Tax. In practice, an expense is deductible when it meets all of the following requirements:

If any of them is missing, the Tax Agency may disallow the expense in an inspection, even if the money was genuinely spent.

• Link to the business: the expense must be needed to generate business income. For assets with mixed use, only the business portion is deductible.
• Supporting documents: it must be backed by a full invoice made out to the business owner, showing their tax number. A simplified receipt is usually not enough.
• Recording: it must be entered in the expenses register or the accounts.
• Correct timing: it is deducted in the year in which it accrues, regardless of when it is paid, unless you have opted for the cash basis.

How the simulator calculates the saving

The simulator annualises the amounts (multiplying them by 12 if you choose monthly) and applies each item's rule: 100% for business premises rent, professional advice, advertising, office supplies, depreciation of IT equipment, training, business insurance, subsistence and self-employed social security contributions; 50% for mixed-use phone and internet; the percentage of your home used for the business, as you enter it, for property tax, community fees, rent or mortgage interest on the home; and 30% of that percentage for its utilities. The vehicle is only counted, at 100%, if you tick that it is used exclusively for the business; otherwise its IRPF deduction is zero. Health insurance is capped at €500 per person covered.

The total deductible amount is then multiplied by the marginal rate you select from the indicative bands of the general scale (19%, 24%, 30%, 37%, 45% or 47%). The marginal rate is the rate charged on your last euro of profit and therefore the one that reflects how much tax you save by deducting an expense. It should not be confused with the withholding percentage you apply on your invoices.

The percentages are based on the general IRPF rules, but the portion that is actually deductible depends on each case: the share of the home must be declared and consistent with the floor space used for the business, subsistence must stay within the daily limits and vehicles are subject to specific rules explained below. Also, if the expenses move you into a lower band, part of the saving is made at a lower rate than the one selected.

Worked example

Using the simulator's default monthly figures, which add up to €1,200 a month, annual spending comes to €14,400 and the total deductible amount to €14,160. The business items deductible at 100% contribute €9,840; self-employed contributions, €3,600; health insurance, €480, below the €500 limit for one person; and the mixed-use phone, €240, half of its cost.

With a 30% marginal rate, the estimated IRPF saving is €4,248; at 24%, it is €3,398.40. The difference shows how the same expense has a different tax impact depending on the self-employed person's level of profit.

The key point is that a deductible expense is not free: it reduces tax in proportion to your marginal rate, but you still bear the rest of the cost. Spending purely to pay less tax rarely makes economic sense.

Specific rules worth knowing

Some items are treated in a particular way for IRPF and are worth reviewing before including them in your return:

• Vehicles: for IRPF the general rule is that a vehicle is only deductible if used exclusively for the business, with exceptions such as goods vehicles, those used by sales representatives or agents, driving school vehicles and passenger transport. That is why the simulator only counts it if you tick exclusive use. The 50% business-use figure is a VAT presumption, not an IRPF one.
• Utilities at home: water, electricity, gas, phone and internet are deductible at 30% of the proportion of the home used for the business, provided that use has been declared. Rent, property tax (IBI), community charges and home insurance are deductible in proportion to the floor space used.
• Subsistence: the self-employed person's own meal expenses are deductible if incurred in restaurants or hospitality venues, paid electronically and not above €26.67 a day in Spain or €48.08 abroad, amounts that double when staying overnight outside the usual municipality.
• Health insurance: premiums for the self-employed person, their spouse and children under 25 living with them are deductible up to €500 per person per year, or €1,500 in the case of disability.
• Equipment and capital assets: computers, furniture or vehicles are not deducted all at once but through annual depreciation according to the official tables. Free depreciation is available for new low-value items of up to €300 each, with an annual limit of €25,000.
• Self-employed contributions and hard-to-document expenses: contributions to the self-employed scheme are deductible, and under the simplified direct assessment method a percentage of net earnings is also allowed for hard-to-document expenses, up to €2,000 a year.

Common mistakes

Most tax adjustments relating to expenses stem from errors that a little organisation can prevent:

• Deducting personal or family expenses, such as meals unrelated to the business, everyday clothing or holidays.
• Applying the same percentage for IRPF and VAT: they are different taxes and their deduction rules do not always match.
• Deducting the full cost of a computer or vehicle in one year when it should be depreciated over several.
• Keeping only till receipts instead of full invoices showing the owner's details.
• Deducting all household utilities when only part of the home is used for the business.