Cars in Business in the Czech Republic: Taxes and Accounting

Nearly every entrepreneur in the Czech Republic utilizes a car for their business activities.

A car can be classified as a business asset if it is used for business purposes. This applies to both individuals and legal entities. Including a car as part of your business assets comes with various accounting, tax, and administrative responsibilities, which we will explore in this article.

Cars in Accounting: A Simplified Explanation

When a company acquires a vehicle, it is recorded in the accounting records as the purchase of a fixed asset. This means it is not just a one-time expense, but the acquisition of an asset that will be utilized for an extended period.

The cost of a vehicle is not expensed immediately but is gradually spread over its estimated useful life. This process is called depreciation. There are various methods of calculating depreciation, and the choice depends on the company’s accounting policy.

In addition to financial accounting, there are also tax accounting considerations. The rules for depreciating a vehicle for tax purposes may differ from the accounting rules. It is crucial to remember that depreciation for tax and accounting purposes may not always align.

If you upgrade or significantly improve a vehicle, its value may increase. In such cases, a special assessment is needed to determine the new value of the vehicle and recalculate depreciation accordingly.

Regular maintenance and repairs do not increase the value of the vehicle and are immediately expensed as operating costs.

For Individual Entrepreneurs

If you are an individual entrepreneur, the rules for accounting for a vehicle may be slightly simpler. You can also expense a portion of the vehicle’s cost, but the rules differ slightly from those for legal entities.

Important: Accounting is a complex subject, and specific situations may require professional guidance. If you have any questions or need further assistance, it is best to consult with an accounting specialist.

Gasoline Costs: How to Account for Them

When a company uses a vehicle, one of the largest expenses is fuel.

If the car is used exclusively for business purposes, then all fuel costs can be fully included in the company’s expenses.

If the vehicle is also used for personal reasons, only a portion of the fuel costs can be attributed to the business.

How to Calculate Gas Costs

1. Actual Consumption: This is the most accurate method. You need to track the number of kilometers driven and the amount of fuel purchased.
   
2. Fixed Rate: You can use an average cost of fuel per kilometer. This method is simpler but may not be as beneficial if the vehicle is driven extensively.
   

If you choose to use the fixed rate method, keep in mind that other costs, such as parking fees, are typically included in this calculation.

VAT Deduction When Purchasing a Vehicle

When purchasing a vehicle intended for commercial use, you may be eligible to claim a VAT deduction on the purchase price. This deduction can often represent a significant amount, making it a valuable benefit for entrepreneurs. However, eligibility for the deduction is not guaranteed in all cases.

A new regulation this year introduces a limit on the VAT deduction. If an entrepreneur, whether an individual or a legal entity, purchases a vehicle as part of their business assets, they can claim VAT up to 2,000,000 Czech crowns excluding VAT. However, there are exceptions to this rule as well.

Proportional and Reduced VAT Rates

If a vehicle is used partially for personal purposes, the entrepreneur must submit a claim for a reduced or proportional VAT deduction. The proportional rate applies when the vehicle is used for both private and business purposes. In this case, the utilization rate of the vehicle is determined, and the right to deduct VAT applies based on this ratio.

On the other hand, the reduced rate applies when the vehicle is used for business activities, but both taxable and exempt transactions occur without the right to deduct VAT. A typical example would be a financial consultant who acts as an intermediary in insurance (an exempt transaction) while also engaging in activities in the real estate sector (a taxable transaction).

However, the rules surrounding these rates can be quite complex, and some accounting entries may be subject to revision at the end of the year. Therefore, it is advisable to consult a specialist for assistance with these matters. For help from professional outsourced accountants, feel free to contact us at 360WEDO.

Logbook

One of the responsibilities associated with using a car for business purposes is maintaining a logbook. This record is designed to demonstrate that the vehicle is used for business activities and that the costs are properly allocated between business and private use.

The logbook must contain entries for each journey, including the date, kilometers traveled, and purpose of the trip. This obligation applies to all entrepreneurs who wish to claim the costs of operating a vehicle as tax-deductible expenses for income tax purposes, unless they opt for a flat rate for transportation expenses.

However, keeping a logbook is also crucial for defending VAT deduction claims. Even if an entrepreneur uses a flat rate for income tax purposes, they are not exempt from the requirement to maintain a logbook for VAT purposes.

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