How to Properly Account for Business Expenses and Income in the Czech Republic

Entrepreneurs in the Czech Republic have several options for how they report business expenses and match them with their income. What is the most advantageous approach, and what factors should be considered when choosing how to declare expenses?

Self-employed individuals (commonly referred to as “sole proprietors”) must meet specific obligations in connection with their business activities. These responsibilities come with a certain administrative burden – one of the key duties being the annual filing of a tax return.

Changing the Scheme: When and How to Do It

To file an accurate tax return, sole proprietors in the Czech Republic must maintain proper records of their income – and, if applicable, their expenses. They have several options for how to track and report this information, but it’s important to carefully and promptly choose the approach that best suits their business.

Since expenses reduce both the tax base and the final tax liability, selecting the right method is key. Entrepreneurs can choose to deduct actual expenses, apply a flat-rate expense scheme, or switch to a flat-rate tax regime. Each of these options has its own rules, advantages, and long-term implications.

Taxation Options and Declaring Business Expenses

Entrepreneurs in the Czech Republic can choose from three basic tax regimes: 

• declaring actual expenses, 
• applying flat-rate (lump sum) expenses,
• using the flat-rate tax regime.

Each approach has its own rules, advantages, and suitability depending on the nature of the business.

Under the actual expense regime, entrepreneurs deduct real business-related costs by submitting supporting accounting documents. This method requires maintaining proper tax records – in other words, tracking both income and expenses. It is particularly suitable for entrepreneurs with significant expenses or those who employ staff.

Actual Expenses and Tax Accounting

When using the actual expenses method, entrepreneurs are required to keep detailed tax records that document all income and business-related expenses. The main advantage of this method is the ability to deduct real, verifiable expenses – which can be highly beneficial for businesses with significant costs, such as materials, goods, fuel, payroll, or rent.

However, all expenses must be properly documented and clearly related to the business activity. In the event of an audit, the tax authority may request proof that these expenses were genuinely incurred to generate, secure, or maintain business income. The burden of proof always lies with the entrepreneur.

If certain items – such as a phone, internet, or vehicle – are used for both business and personal purposes, only the portion used for business can be claimed as an expense.

While this form of tax accounting is the most complex in terms of administration, it offers the greatest potential for tax optimization. It is especially well-suited to businesses with high operational costs.

Flat Rate Expense (Lump Sum)

Flat rate expenses are a simplified option in which the entrepreneur does not keep detailed records of expenses, but declares them as a percentage of income. This scheme is often popular due to its simplicity – it is sufficient to keep records of income and accounts receivable, not individual expense receipts.

The amount of the flat rate depends on the nature of the business. Businesses can choose between a flat rate of 80%, 60%, or 40% depending on the type of activity, or 30% for rental income.

• 80% of income – for farmers and artisans
  
• 60% of income – for other trades and professions
  
• 40% of income – for liberal professions (e.g. doctors, lawyers)
  

However, the maximum amount of expenses that can be declared using this method is limited. The limit is based on a maximum income of CZK 2 million, meaning:

• Entrepreneurs using the 80% flat rate can deduct up to CZK 1.6 million
  
• Entrepreneurs using the 60% flat rate can deduct up to CZK 1.2 million
  
• Entrepreneurs using the 40% flat rate can deduct up to CZK 800,000
  

The main advantage of the flat rate expense scheme is its low administrative burden. This scheme is ideal for entrepreneurs with relatively low business costs.

Single Tax

The single tax regime is becoming increasingly popular. Entrepreneurs especially appreciate that under this scheme, they are not required to file a tax return – only to keep records of their income and accounts receivable. With a single monthly payment, they cover advance payments for income tax, social security, and health insurance.

This scheme can be considered the simplest: the entrepreneur does not maintain tax records, file tax returns, or submit reports to insurance companies. Everything is handled through one monthly payment, which varies depending on the selected band – from the first to the third.

Depending on the chosen band, entrepreneurs pay a fixed monthly amount. The first band is the cheapest and also the most commonly used.

The single tax regime is suitable for businesses with low expenses, no employees, and a desire to minimize administrative obligations. The main disadvantage is that no tax credits or deductions can be claimed – so entrepreneurs with higher expenses or who would otherwise benefit from, for example, child tax credits, may lose out under this scheme.

It is also important to ensure that all conditions outlined in the Income Tax Act are met. If the taxpayer fails to meet these conditions, they may be required to file a tax return or leave the scheme entirely.

Changing the Scheme – When and How to Do It?

The method of taxation and expense declaration can be changed annually, always from the beginning of the calendar year. However, some regime changes require timely notification.

For instance, if an entrepreneur wishes to switch to the flat-rate tax scheme, they must notify the tax office no later than January 10 of the given year.

In the case of switching between flat-rate expenses and actual expenses, no special notification is needed – the choice is reflected directly in the submitted tax return. This flexibility allows entrepreneurs to evaluate each year which option is most advantageous for their specific situation.

When choosing the right taxation method, it’s worth comparing the potential tax burden of each regime. Consulting an accountant or tax advisor can help ensure the best decision is made. A timely switch can result in significant savings and reduce stress throughout the year.

Need help choosing the best tax regime or preparing your tax return? At 360WEDO, we offer expert outsourced accounting services to guide you every step of the way – efficient, reliable, and tailored to your business.

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