Meaning
Statutory provision governing the deductibility of business expenses defines the boundaries of taxable income for corporate entities. Under enterprise income tax law article 8, reasonable expenditures related to the generation of income are permitted as deductions. The law requires that these costs be supported by legitimate documentation and verified through standard accounting practices.
It ceases to apply when expenses are personal in nature or specifically excluded by higher-level tax circulars.
Deduction Criteria
Costs must be necessary for the operation of the business and directly contribute to the production of revenue. Auditors check for the presence of a business purpose behind every transaction. Non-essential spending faces rejection.
Expense Substantiation
Formal tax invoices known as fapiao represent the primary evidence for any claim. The enterprise income tax law article 8 requires that the amount on the invoice matches the actual cash outflow recorded in the bank statements. If a company fails to provide these documents, the local tax bureau will add the amount back to the taxable profit.
This results in higher effective tax rates for under-prepared firms.
Audit Exposure
Tax authorities prioritize the review of large service fees and intercompany charges to ensure compliance with this article. Disallowing a deduction often leads to the assessment of back taxes and late payment surcharges. Accurate record retention is the main defense against these adjustments.
