In this blog post, we will delve into the special cases concerning the exclusion of expenses related to business-use vehicles from necessary expenses according to Article 33-2 of the Income Tax Act in Korea. We will also explore the scope of business-use vehicles and the calculation of expenses related to them. Additionally, we'll discuss the depreciation of business-use vehicles and how loss from their disposal is treated.
Scope of Vehicles for Business Use
Business-use vehicles refer to passenger vehicles (excluding light-weight vehicles of 1,000 cc or less) used directly for business purposes during the relevant taxable period, as defined in Article 1 (2) 3 of the Individual Consumption Tax Act. However, certain vehicles are excluded from this definition, such as those used in transportation business, auto sales, auto lease, driving schools, and more (Article 78-3 (1), Enforcement Decree of the Income Tax Act).
Expenses Related to Business-Use Vehicles
Expenses related to business-use vehicles encompass various costs incurred for their acquisition and maintenance. These expenses may include depreciation costs, lease expenses, fuel expenses, insurance premiums, maintenance expenses, automobile taxes, toll fees, interest expenses on financial lease loans, and more (Article 78-3 (2), Enforcement Decree of the Income Tax Act).
Calculation of Business-Use Expenses
The calculation of business-use expenses depends on whether a driving log was kept or not.
1. Where a driving log was kept:
Business-use expense = Business-use vehicle-related expense × business use ratio
- Note 1> A log should be kept and maintained for each vehicle in accordance with National Tax Service notice no. 2022-8 (Apr. 1, 2022)
- Note 2> Business use ratio = Distance traveled for business use per vehicle ÷ Total distance traveled. A business operator who intends to have the business use ratio applied should prepare and keep a driving log for each business-use vehicle, and should submit the log where requested by the head of the jurisdictional tax office (Article 78-3 (6), Enforcement Decree of the Income Tax Act)
2. Where a driving log was not kept:
The "business use ratio" is as follows:
Where vehicle-related expenses are 15 million won or less:
100%
If held or rented during part of the taxable year, etc: 15 million won ×(number of months held or rented÷12)
Where vehicle-related expenses exceed 15 million won:
15 million won ÷ Business-use vehicle related expenses
Depreciation of Business-Use Vehicles
1. Depreciation expense of business-use vehicles ( Article 78-3 of the Enforcement Decree of the Income Tax Act)
For a business subject to confirmation of compliant filing for income attributable to 2015 (based on gross revenue of the taxable period that precedes the period to which the acquisition date belongs), it shall apply first to passenger vehicles acquired during the taxable period to which Jan. 1, 2016 belongs. For a business who is required to do double-entry bookkeeping but is not subject to confirmation of compliant filing, it shall first apply to passenger vehicles acquired on or after Jan. 1, 2017 (Enforcement Decree no. 26982, Article 7 (3) of the Addendum, Feb. 17, 2016).
2. Calculation of Amount Exceeding Depreciation Expense Ceiling
Where the following amount exceeds 8 million won for the relevant taxable year, the amount in excess.
Depreciation costs for business-use vehicles = Depreciation cost (equivalent amount 1 ) × Ratio of business use under driving log
- ① Leased from a facility lease business operator: The amount of rent excluding insurance premium, automobile tax and maintenance expense [7% of the rent (the amount excluding insurance premium and automobile tax) if it is difficult to tell]
- ② Leased from a vehicle lease business operator other than a facility lease business operator (rented car): 70% of the rent
3. Inclusion of amount exceeding depreciation expense in necessary expense
- ① Depreciation expense carried forward: Depreciation expense not over 8 million won is recognized as the ceiling
- ② Amount equivalent to depreciation expense carried forward: If the amount equivalent to depreciation cost, out of the business use amount of the relevant business-use passenger vehicle does not reach 8 million won, such maximum amount of depreciation cost shall be included in necessary expenses, provided that the remainder in the taxable period in which ten years from the end of rental elapse shall be fully included in necessary expenses.
## Non-Inclusion of Loss from Disposal of Business-Use Vehicles in Necessary Expense
1. How to treat loss from disposal of business-use vehicles
- ① Where a person subject to double-entry bookkeeping incurred loss from disposal of business-use vehicles and the amount per vehicle exceeds 8 million won, 8 million won shall be included in necessary expense from the taxable period following the relevant taxable period.
- ② For the taxable period in which the residual amount is less than 8 million won and the taxable period to which falls the date on which 10 years have passed since the date of disposal of the business-use vehicle, the residual amount shall be included in necessary expense.
- A person subject to simplified bookkeeping cannot include the carried-over losses from sale of vehicles for business use in necessary expenses in the taxable period.
2. Loss from disposal due to business closure
Where a person subject to double-entry bookkeeping closes his/her business, the amount carried forward among loss from disposal of depreciation costs shall be included in necessary expense in the taxable period to which the date of business closure belongs ( Article 42 (7), Enforcement Rules of the Income Tax Act).
Conclusion
In conclusion, understanding the special cases concerning the exclusion of expenses related to business-use vehicles and the calculation of necessary expenses is crucial for taxpayers in Korea.