IRAE: which expenses you can deduct (and which you can't)

A big advantage of IRAE on real accounting is that you pay on your net profit: income minus expenses. But not every expense can be subtracted. Here's, plainly, what you can deduct and what you can't, so you aren't caught out at filing time.

The principle: necessary, accrued and documented

The base rule is clear: to reach net income you deduct from gross income the expenses accrued in the year that are necessary to obtain and preserve the taxed income, and that are properly documented. If an expense isn't necessary for your activity, or you have no receipt, it doesn't count.

The “lock rule” (regla candado)

Here's the detail that surprises many: besides being necessary and documented, an expense is only deductible if it's taxable income for whoever charges you (under IRAE, IRPF, IRNR or an effective foreign tax). If your supplier isn't taxed on that income, your deduction can be partial or nil. So it pays to buy from those who are formalized.

What you CAN'T deduct

Some expenses are expressly excluded. Among the most common:

• The owner's withdrawals from the unipersonal (not an expense).
• IRAE itself and the Wealth Tax.
• Fines and penalties for tax infractions.
• Expenses meant to generate non-taxed income.
• Losses from illicit operations.

Examples of deductible expenses

Meeting the principle and the lock rule, you can usually deduct, among others:

• Inputs and merchandise of your activity.
• Rent of the premises and services (power, internet) used for the business.
• Staff salaries and contributions.
• Depreciation of fixed assets used in the activity.
• Professional fees and services contracted (invoiced).

IRAE ficto vs real accounting

Note: if you pay IRAE ficto, you do NOT deduct your real expenses — you pay on a fixed percentage of income. Keeping real accounting and deducting pays when you have many documented expenses (low margin); with few expenses, ficto is usually simpler and cheaper. See our IRAE ficto post.

At a glance

In short: in real IRAE you deduct expenses that are necessary, documented and taxable for the counterpart; not withdrawals, IRAE itself or fines. With many expenses, deducting pays; if not, look at ficto. When in doubt, an accountant prepares the return.