Tax Accounting and Tax Records
What the exam tests
The boundary between bookkeeping and the tax base: which expenses can reduce taxable profit, how tax depreciation is calculated, and how a sole trader's tax records differ from double-entry accounting.
Core rules
- The Income Tax Act (586/1992 Coll.) defines deductible expenses as those incurred to generate, secure and maintain taxable income, subject to listed exceptions. Fines, penalties, representation costs, and unpaid contractual sanctions are generally non-deductible; so are costs of a personal nature.
- Tax depreciation is set by the Act, not by the accounting depreciation plan. The taxpayer may use straight-line or accelerated methods for tangible assets; accounting depreciation remains an accounting estimate and is adjusted in the tax return.
- Provisions and reserves are largely non-deductible unless the Act expressly allows them. Bad-debt write-offs are deductible only under the statutory conditions.
- A sole trader may keep tax records (daňová evidence) of income and expenses, plus records of assets and liabilities, instead of double-entry books. A company always uses double-entry accounting.
- The tax return starts from the accounting result and is adjusted by non-deductible items, non-taxable income, and tax incentives.
Worked example
A company has accounting profit of CZK 900,000. It pays a CZK 30,000 fine and spends CZK 50,000 on client entertainment, both non-deductible; it also has accounting depreciation of 100,000 while the maximum tax depreciation is 160,000. The tax base is 900,000 + 30,000 + 50,000 + 100,000 - 160,000 = 920,000. At 21% corporate tax, the liability is 193,200. The reasoning is to add back accounting expenses that are not deductible and replace accounting depreciation with the tax amount.
Traps
Deducting VAT for a non-VAT payer; deducting representation; forgetting to add back accounting depreciation and deduct tax depreciation; applying the corporate rate to a sole trader's personal tax; ignoring the limits on lump-sum expenses. Also check the distinction between a tax record and an accounting document: tax records do not need double-entry, but must still be complete and verifiable.