Can I put an expensive watch in my expenses? Tax optimisation in practice.

Almost every one of our tax and accounting clients is dealing with dilemmas about what they can and cannot include as a tax expense. Will the tax office allow my watch, handbags or clothes? Sometimes yes, sometimes no.

I don’t necessarily have to be an attorney or a financial advisor. After all, every entrepreneur may have some legitimate reason why they need a more expensive watch (or purse) to conduct their business. But is it legitimate enough?

For example, the courts have dealt with a case concerning the procurement of spectacles by a crane operator who had an eye defect. In that case, the court did not consider such a cost to be a tax expense because the crane operator would have had to acquire the glasses anyway.

However, what if any regulations require the taxpayer to acquire an item to which the associated cost may be a personal necessity? For example, the internal rules of the Slovak Bar Association require attorneys to maintain a dignified appearance. For women, this means wearing a skirt or trouser suit, blouse, dress and dress shoes appropriate to the season. And, in turn, male attorneys must wear a men’s suit. And supposedly airline pilots must have a second pair of goggles purchased.

Are party clothes or glasses a tax expense in such cases?

If I’m a professional athlete, I need a special watch to perform my activity. However, it can always be argued that I would buy a special watch even if I were not a professional athlete. But can the tax authorities thus lump any expenditure on the acquisition of property which may be of a personal use as a tax expenditure? If so, what about mobile phones or laptops? And what if I use my car to take care of private business while I am travelling for work?

So can I put the watch in my tax expenses?

In most cases, especially for office-based professions, the use of smart watches can be justified, for example, because of the handling of sms, time records, navigation and other functions that are practical for business. It is the same as with a mobile phone. If we questioned the purposefulness of such an expense, we could, after a while, discuss whether everyone needs a colour printer, the latest iPhone and so on.

But what about luxury watches (like handbags) bought to impress in order to attract customers? Here it looks like “representation”, which is not recognised as a tax expense by default. However, there are other types of “representations” that are recognised as a tax expense. Why can an upscale office space (i.e., location, classification, or reception desk appearance) be recognized as a tax expense and a luxury watch is not? After all, we don’t primarily need both “representations” for the business?

Luxury watches build an image just like expensive leather sofas, designer desks and suits. And in that case, in principle, the cost of acquiring them should be treated as a tax expense.

To summarise, we can come to the following conclusions

If the following conditions are met, the cost of the luxury watch should be treated as a tax expense:

• it can be demonstrated that such a standard is necessary in order for the taxpayer, for example, to gain the confidence of certain clients if the taxpayer works in an industry where a certain standard is expected and the absence of such a standard will diminish that confidence; and
• it is satisfactorily explained that such equipment is not used privately (e.g. by storing the watch in a safe after work and demonstrating that the taxpayer owns a company watch for non-business purposes, etc.)

And if I shy away from proving it to the tax office, I can still take advantage of claiming the 80%-20% expenses. And then what about the VAT deduction? About this can be personally or on one of our videos, where we also cover these topics.