Accurate declaration when preparing tax returns is vital for businesses to fulfill their financial responsibilities and ensure legal compliance. However, not every expenditure incurred by businesses during their commercial activities is accepted as an expense in tax terms. At this point, Non Legally Accepted Expenses (NLAE) are a special category that businesses face and are not taken into account in tax calculations. So, what exactly is NLAE? Which expenses fall under this scope? Why should it be considered in the financial planning and declaration processes of businesses? You can find clear and detailed answers to all these questions in this article.
What is a Non Legally Accepted Expenses (NLAE)?
Non-Legally Accepted Expenses (NLAE) are costs that cannot be deducted when calculating a company’s commercial income, and thus cannot be subtracted from taxes. Although these expenses can affect the balance between a business’s income and expenses, they do not factor into the tax base.
Under Turkish tax law, NLAEs are explicitly defined in both the Income Tax Law and the Corporate Tax Law. These regulations stipulate that only expenses directly related to a company’s commercial activities may be deducted; all other expenses remain non-deductible.
The main goal of designating certain expenses as NLAEs is to ensure that businesses accurately and transparently report their true commercial income, thereby preventing potential tax losses. This category typically includes personal expenses, luxury spending unrelated to business activities, or expenses that breach existing regulations. Correctly identifying these costs helps companies avoid penalties and reinforces legal compliance.
Why Are Non-Legally Accepted Expenses Important?
Because NLAEs directly affect a company’s tax base, they play a crucial role in financial processes. Failing to report these expenses accurately—or overlooking them entirely—can lead to significant penalties and financial losses. Moreover, inaccurate declarations can damage a company’s financial reputation and undermine its legal standing.
NLAEs are not just a concern for accounting and finance departments; business owners and managers also need to stay informed. By understanding which expenses are classified as NLAEs and how they should be managed, businesses can plan more effectively and make informed financial decisions. Properly applying NLAE guidelines ensures a business transparently reports its actual earnings and meets all legal requirements.
Paying close attention to NLAEs is a critical step in preserving a company’s financial well-being and maintaining legal compliance.
Which Expenses Are Non-Legally Accepted Expenses (NLAE)?
Under Turkish tax legislation, the main categories of expenses that fall under Non-Legally Accepted Expenses (NLAE) can be summarized as follows:
Personal & Family-Related Expenses for the Business Owner
Wages, bonuses, or other payments made to the business owner, their spouse, and children.
Interest accrued on the capital that the owner has contributed to the business.
Interest calculated on the balances or receivables of family members in the business’s current accounts.
Expenses Stemming From Crimes & Penalties
Monetary fines, compensations, and other sanctions imposed as a result of crimes committed by the business or its owner.
Tax penalties and late payment interests.
Compensation arising from offenses committed through media outlets (press, radio, or television).
Luxury & Non-Business-Related Expenses
Costs and depreciation of yachts, boats, airplanes, or other vehicles not directly related to the company’s line of business.
All advertising or promotional expenses related to alcohol and tobacco products.
Taxes & Personal Expenses
Personal taxes such as Income Tax and other individual taxes.
Personal spending by the business owner.
Financing Expense Restrictions
In businesses where external financing exceeds equity, a certain portion of interest, exchange rate differences, and commissions may be treated as NLAE.
Expenses Contrary to Legislation
Any expenses that do not comply with applicable regulations or that cannot be documented.
Expenditures unrelated to the company’s commercial activities.
The Impact of NLAEs on Tax Filings
When preparing tax returns, Non-Legally Accepted Expenses (NLAE) are considered costs that cannot be deducted from a business’s commercial income. Because these expenditures do not reduce the taxable base, accurately categorizing them is crucial for creating correct financial statements. Properly identifying and listing NLAEs—often on a separate schedule—ensures that the taxable income is calculated correctly.
If a business overlooks NLAEs or misreports them, it risks inaccurate tax calculations and, consequently, may face penalties. Taking care to classify and report NLAEs correctly is therefore essential for both compliance and financial accuracy.
How Are Non-Legally Accepted Expenses (NLAE) Calculated?
The calculation process for Non-Legally Accepted Expenses (NLAE) involves the following steps:
Classifying Expenditures All of the company’s expenses are thoroughly reviewed and classified within the relevant tax period.
Identifying Items Covered by NLAE In accordance with current regulations, it is determined which expenses fall under the scope of NLAE.
Presenting NLAE Separately These expenses are listed separately in such a way that they cannot be deducted from the tax base.
Calculating the Tax Base The tax base is calculated by taking into account only those expenses not classified as NLAE.
Conducting this process accurately is vital for meeting a business’s financial obligations and maintaining legal compliance.
Points to Consider Regarding NLAE
To avoid mistakes and ensure legal compliance with respect to Non-Legally Accepted Expenses (NLAE), businesses should pay attention to the following:
Staying Current with Regulations Any changes in tax laws must be tracked on a regular basis. What qualifies as NLAE may shift with updates to laws and regulations. Staying informed about the latest developments minimizes the risk of inaccurate declarations.
Proper Documentation and Record-Keeping All expenditures falling under NLAE must be properly documented and recorded. The connection between each expense and commercial activity should be clearly stated, along with its legal basis. Maintaining complete and organized records not only streamlines audits but also prevents potential penalties.
Seeking Expert Support It is essential to consult accounting and tax experts during the calculation and reporting of NLAE. Such professionals can help accurately classify expenses, increase the correctness of tax filings, and ensure businesses meet their legal obligations fully.
By paying attention to these points, you can help prevent potential issues related to NLAE and manage your company’s financial processes more effectively. Proper record-keeping, regulatory compliance, and professional advice play a crucial role in safeguarding both the financial health and reputation of your business.
Understanding and correctly applying NLAE is paramount for maintaining legal compliance and avoiding unnecessary costs. However, any mistakes made in this process can expose businesses to penalties. For this reason, expenses falling under NLAE should be reviewed regularly and reported accurately—not only by accounting teams but also with the guidance of professionals well-versed in tax regulations.
