Non-Deductible Expenses (NDEx / KKEG)

 

For businesses engaged in commercial activities, the correct classification of expenses is crucial for both accurate financial reporting and proper tax compliance. However, not every expense incurred by a business can be deducted from the tax base. Under tax legislation, certain expenditures are not allowed to reduce taxable income. These expenses are referred to as Non-Deductible Expenses, known in Turkish tax practice as Kanunen Kabul Edilmeyen Giderler (KKEG).

Although such expenses are recorded as costs in accounting books, they are excluded from tax calculations and therefore increase taxable profit. Incorrect or incomplete classification of non-deductible expenses may lead to serious risks during tax audits.

In this article, we comprehensively examine the concept of non-deductible expenses, their legal basis, the types of expenses covered, and how they should be recorded in accounting.

 

What Are Non-Deductible Expenses?

 

Non-deductible expenses are expenditures incurred by a business that cannot be deducted from taxable income due to restrictions imposed by tax laws. While these expenses appear in accounting records, they are disregarded when determining the tax base.

In other words, although such expenses qualify as costs from an accounting perspective, they are legally prohibited from reducing taxable profit. A proper understanding of this concept is essential to avoid incorrect tax declarations and to ensure sound financial planning.

 

Which Expenses Are Considered Non-Deductible?

 

Tax legislation defines non-deductible expenses through both general principles and specific provisions. Examples of expenses falling under this scope include:

• Expenses related to vehicles used for non-business purposes
• Monetary penalties and tax fines
• Personal expenses of shareholders or business owners
• Donations and grants exceeding legal limits or failing to meet formal requirements
• Financing expenses exceeding legally allowed thresholds

These expenses must be recorded using the appropriate non-deductible expense account codes. Proper classification significantly reduces the risk of penalties during tax inspections.

 

Legal Framework Governing Non-Deductible Expenses

 

Rules regarding non-deductible expenses are set out in several tax laws, primarily:

• Tax Procedure Law (VUK)
• Income Tax Law (GVK)
• Corporate Tax Law (KVK)

These regulations clearly specify which expenses cannot be deducted from income and under what conditions they must be treated as non-deductible.

 

Non-Deductible Expenses for Income Taxpayers

 

Individual taxpayers calculating their commercial income must comply with Articles 40 and 41 of the Income Tax Law:

• Article 40 lists deductible expenses.
• Article 41 defines expenses that are not deductible.

Sole proprietorships and self-employed individuals are required to classify their expenses accordingly and exclude non-deductible items from their tax base.

 

Non-Deductible Expenses for Corporate Taxpayers

 

Capital companies must consider Articles 10 and 11 of the Corporate Tax Law in addition to the relevant provisions of the Income Tax Law.

• Article 10 regulates certain special deductions.
• Article 11 explicitly lists non-deductible expenses.

Items such as hidden profit distributions, certain representation and hospitality expenses, and interest calculated on equity fall within this category.

 

Non-Deductible Expenses Under the Income Tax Law

 

Key examples of non-deductible expenses under the Income Tax Law include:

• Cash and in-kind withdrawals made by the business owner, spouse, or children
• Salaries, bonuses, compensation, and similar payments made to the owner or close relatives
• Interest calculated on capital invested in the business
• Differences arising from transactions with related parties that violate the arm’s length principle
• Monetary fines and tax penalties
• Advertising expenses related to alcohol and tobacco products
• Expenses and depreciation of sea and air vehicles not related to the core business activity
• Donations and grants exceeding legal limits or lacking required formal conditions

 

Expenses Commonly Considered Non-Deductible Under Both GVK and KVK

 

Certain expenses are disallowed under both income and corporate tax legislation, including:

• Expenditures arising from violations of public order
• Personal expenses unrelated to business activities
• Payments aimed at artificially reducing taxable income

Such expenses are non-deductible regardless of the taxpayer’s legal status.

 

Conditions for Deducting an Expense for Tax Purposes

 

For an expense to be deductible from taxable income, two fundamental conditions must be met simultaneously:

1. The expense must be directly related to the generation and continuation of commercial income.
2. The expense must be properly documented in accordance with the Tax Procedure Law.

Expenses failing to meet these criteria cannot be deducted for tax purposes, even if they are recorded in accounting books.

 

Non-Deductible Expenses Based on General Principles of Tax Law

 

Some expenses may be considered non-deductible even without an explicit statutory provision, due to their inconsistency with fundamental tax law principles. These include:

• Expenses unrelated to business operations
• Costs that cannot be supported by valid documentation
• Expenditures resulting from illegal activities
• Expenses recorded in violation of the accrual and periodicity principle

Such expenses may expose taxpayers to both additional tax assessments and penalties.

 

Inflation Adjustment, Non-Deductible Expenses, and Prior Year Losses

 

In inflation accounting practices, non-deductible expenses and prior year losses require special attention. Expenses classified as non-deductible:

• Cannot be subject to inflation adjustment
• Cannot be offset against prior year losses

Therefore, when reviewing historical financial data, businesses must clearly separate non-deductible items from deductible expenses.

 

How Are Non-Deductible Expenses Recorded in Accounting?

 

Although non-deductible expenses cannot be deducted for tax purposes, they must still be recorded in accounting records. These expenses are generally tracked under the relevant expense accounts, while their tax effects are monitored separately through memorandum (off-balance-sheet) accounts.

This approach ensures that financial statements reflect the true financial position of the business while allowing accurate tax calculations.