(Article 22, paragraph 1)
Article 22, paragraph 3 lists three kinds of items that count as deductible expenses: item 1 is cost of sales, item 2 is expenses such as selling expenses and general and administrative expenses, and item 3 is losses. The part that sets out the expenses in item 2 is this. > 前号に掲げるもののほか、当該事業年度の販売費、一般管理費その他の費用（償却費以外の費用で当該事業年度終了の日までに債務の確定しないものを除く。）の額[［1］](#ref-1) > > Reference translation (unofficial): In addition to what is listed in the preceding item, the amount of selling expenses, general and administrative expenses and other expenses for that business year (excluding expenses other than depreciation for which the obligation has not been finalized by the end of that business year).(Article 22, paragraph 3, item 2, excerpt)
The part in parentheses is a technical rule meaning "of expenses other than depreciation, those whose obligation has not been finalized are excluded." The key point is that the expenses eligible to be deductible are "selling expenses, general and administrative expenses and other expenses for that business year." Selling expenses and general and administrative expenses are understood to be the costs of running the business. In other words, whether something is deductible is **decided by what the money was spent on**. Article 22 contains no wording about the method of payment. A card statement shows the date, the merchant and the amount, but not what the spending was for. The rules for sole proprietors have the same structure. On the necessary expenses of business income and similar income, Income Tax Act, Article 37, paragraph 1 (e-Gov Law Search) says: > 別段の定めがあるものを除き、これらの所得の総収入金額に係る売上原価その他当該総収入金額を得るため直接に要した費用の額及びその年における販売費、一般管理費その他これらの所得を生ずべき業務について生じた費用（償却費以外の費用でその年において債務の確定しないものを除く。）の額とする。[［3］](#ref-3) > > Reference translation (unofficial): Except where otherwise provided, the amount of cost of sales relating to the gross revenue of those kinds of income and other expenses directly required to obtain that gross revenue, and the amount of selling expenses, general and administrative expenses and other expenses incurred in the business that produces those kinds of income in that year (excluding expenses other than depreciation for which the obligation has not been finalized in that year).(Article 37, paragraph 1, excerpt)
Necessary expenses are (1) expenses directly incurred to earn revenue, such as cost of sales, and (2) expenses incurred for the business, such as selling expenses and general and administrative expenses. Expenses in (2) do not have to be direct. Now let's compare two fictional people. Both are company presidents who paid with a corporate card.| Person | Paid with the corporate card | Tax treatment |
|---|---|---|
| A | A meal with a client (¥30,000 for 3 people) | Entertainment expenses. There is a limit on how much can be deducted |
| B | A ¥50,000 game console for their own child | Private spending. Cannot be included in deductible expenses |
(Article 34, paragraph 4)
If it is left alone until a tax audit, it is treated as salary. If the person repays the company as soon as they notice, and the matter is handled by an amended return or a prior-period profit and loss adjustment, it is normally not pointed out in an audit (the usual handling in a tax accountant's practice). This salary (economic benefit) has three disadvantages. 1. It does not become a deductible expense of the company. A one-off private expense does not meet the requirements, such as pay of the same amount every month (fixed-amount periodic compensation, teiki dōgaku kyūyo). 2. Withholding becomes necessary. This salary is salary income, so the company must deduct income tax and pay it to the government. If the company does not deduct it because it "thought of it as an expense," the head of the tax office collects that income tax from the company (Income Tax Act, Article 221, paragraph 1)[［14］](#ref-14). 3. The officer's own income tax and resident tax also increase. This is because it is treated the same as receiving salary (officer compensation) from the company. Article 34, paragraph 4 includes economic benefits in salary. Paragraph 1 decides which salary can be deducted. Corporation Tax Act, Article 34, paragraph 1 (e-Gov Law Search) says: > 内国法人がその役員に対して支給する給与（退職給与で業績連動給与に該当しないもの、使用人としての職務を有する役員に対して支給する当該職務に対するもの及び第三項の規定の適用があるものを除く。以下この項において同じ。）のうち次に掲げる給与のいずれにも該当しないものの額は、その内国法人の各事業年度の所得の金額の計算上、損金の額に算入しない。[［2］](#ref-2) > > Reference translation (unofficial): Of the pay that a domestic corporation gives to its officers (excluding retirement pay that does not fall under performance-linked pay, pay given to an officer who also has duties as an employee for those duties, and pay to which paragraph 3 applies; the same applies below in this paragraph), the amount that does not fall under any of the pay listed below is not included in deductible expenses in calculating the amount of income of the domestic corporation for each business year.(Article 34, paragraph 1)
In other words, this provision says that pay to officers that falls under none of fixed-amount periodic compensation, pay with a prior fixed notification, and performance-linked pay cannot be a company expense. NTA Tax Answer No.5211 explains the same rule as follows. > 法人が役員に対して支給する給与（注）の額のうち次に掲げる定期同額給与、事前確定届出給与または一定の業績連動給与のいずれにも該当しないものの額は損金の額に算入されません。[［7］](#ref-7) > > Reference translation (unofficial): Of the amount of pay (note) that a corporation gives to its officers, the amount that does not fall under any of the following fixed-amount periodic compensation, pay with a prior fixed notification, or certain performance-linked pay is not included in deductible expenses. The "(note)" in the quotation means: excluding retirement pay, pay for the duties of an officer who also works as an employee in the employee role, and amounts booked by concealing or disguising facts. The legal basis for withholding is the Income Tax Act. Under income tax as well, economic benefits count as revenue (Income Tax Act, Article 36, paragraph 1)[［13］](#ref-13). That a bonus is salary income is written in Income Tax Act, Article 28, paragraph 1 (e-Gov Law Search). > 給与所得とは、俸給、給料、賃金、歳費及び賞与並びにこれらの性質を有する給与（以下この条において「給与等」という。）に係る所得をいう。[［5］](#ref-5) > > Reference translation (unofficial): Salary income means income from stipends, salaries, wages, annual allowances, bonuses, and pay having the nature of these (hereinafter in this Article "salary, etc.").(Article 28, paragraph 1)
And a company has the obligation to deduct income tax when it pays salary and pay it to the government. Income Tax Act, Article 183, paragraph 1 (e-Gov Law Search) says: > 居住者に対し国内において第二十八条第一項（給与所得）に規定する給与等（以下この章において「給与等」という。）の支払をする者は、その支払の際、その給与等について所得税を徴収し、その徴収の日の属する月の翌月十日までに、これを国に納付しなければならない。[［6］](#ref-6) > > Reference translation (unofficial): A person who, in Japan, pays to a resident the salary, etc. prescribed in Article 28, paragraph 1 (salary income) (hereinafter "salary, etc." in this Chapter) must collect income tax on that salary, etc. at the time of payment and pay it to the government by the 10th of the month following the month that includes the date of collection.(Article 183, paragraph 1)
When an officer buys a personal item with the corporate card, the company cannot deduct it and its corporation tax increases. The officer is taxed personally on it as salary. Also, even for someone who is not an officer, if an employee uses the card privately, that amount is treated as salary and withholding is required[［13］](#ref-13)[［5］](#ref-5)[［6］](#ref-6). ## Pitfall 2: The same applies to sole proprietors The same misunderstanding exists among sole proprietors. An example is buying personal items with a business credit card. Here too, the card is only a means of payment. Income Tax Act, Article 45, paragraph 1, item 1 (e-Gov Law Search) says: > 居住者が支出し又は納付する次に掲げるものの額は、その者の不動産所得の金額、事業所得の金額、山林所得の金額又は雑所得の金額の計算上、必要経費に算入しない。 > > 一 家事上の経費及びこれに関連する経費で政令で定めるもの[［4］](#ref-4) > > Reference translation (unofficial): The amounts of the following that a resident spends or pays are not included in necessary expenses in calculating that person's real estate income, business income, timber income or miscellaneous income. > > (1) Household expenses and related expenses specified by Cabinet Order(Article 45, paragraph 1, item 1, excerpt)
Household expenses are money for daily life, such as a family's meals or the rent of a home that is not used for work. Even if you pay with a business card, they are not necessary expenses. NTA Tax Answer No.2210 explains how to treat expenses that mix work and daily life. > この家事関連費のうち必要経費になるのは、取引の記録などに基づいて、業務遂行上直接必要であったことが明らかに区分できる場合のその区分できる金額に限られます。[［9］](#ref-9) > > Reference translation (unofficial): Of these household-related expenses, only the amount that can be clearly separated, based on transaction records and the like, as having been directly necessary for carrying out the business becomes a necessary expense. Costs that serve both work and daily life, such as the rent or utilities of a home that is also a shop, are called household-related expenses. Of these, only the part that can be clearly separated as directly necessary for the business becomes an expense. It is **decided by how the money was used**, not by whose name is on the card used for payment. ## Pitfall 3: Keeping receipts and similar documents is also required Booking an expense and keeping supporting documents (receipts and other evidence) go together. Companies have an obligation to keep books and documents. NTA Tax Answer No.5930. > 法人は、帳簿（注1）を備え付けてその取引を記録するとともに、その帳簿と取引等に関して作成または受領した書類（注2）を、その事業年度の確定申告書の提出期限の翌日から7年間（注3）保存しなければなりません。[［11］](#ref-11) > > Reference translation (unofficial): A corporation must keep books (note 1) and record its transactions in them, and must keep those books and the documents (note 2) it created or received in connection with transactions, etc., for seven years (note 3) from the day after the filing deadline of the tax return for that business year. (Note 1), (note 2) and (note 3) in the quotation are notes in the original text: note 1 is about books, note 2 is about documents relating to transactions, and note 3 is about a special rule for the retention period. As the special rule in note 3, for business years in which a net operating loss under the blue return (blue-return carried-forward loss) arose, among others, the retention period is 10 years[［11］](#ref-11). The documents to be kept include receipts[［11］](#ref-11). A card statement alone does not show what was bought or for whom. Keep supporting documents such as receipts, and for entertainment, record the other party and the purpose［10］. Sole proprietors also have a retention obligation. For white-return filers, NTA Tax Answer No.2080 explains as follows. > 白色申告者に対しても、記帳制度や記録保存制度が設けられています。[［12］](#ref-12) > > Reference translation (unofficial): Bookkeeping and record-retention systems are also provided for white-return filers. People with real estate, business or timber income must keep books recording revenue and necessary expenses for 7 years, and documents such as invoices and receipts for 5 years[［12］](#ref-12). ## What to do Here are five things to keep in mind every day so that card payments do not cause problems.| What to do | In practice |
|---|---|
| Separate business and personal cards | Do not pay private spending with the corporate card. Prepare a personal card and use the two separately［1］［3］ |
| If you pay privately by mistake, handle it correctly | For an officer's amount, withhold tax on it as salary, or, once you notice, have the person repay the company and file an amended return or a prior-period profit and loss adjustment［2］［6］ |
| Keep card statements and receipts together | Keep receipts, and for entertainment expenses record the other party and the purpose［10］［11］ |
| Keep officer pay "fixed-amount periodic" | Pay the same amount every month. If you raise it temporarily partway through the year because profit came in, the increase is not deductible［7］ |
| For mixed spending, separate the business part | For rent and communication costs, book only the part that can be clearly separated as used for the business (sole proprietors)［9］ |