Tax Accounting — Deductible Expenses and Disallowances: Taxes, Fines, Personnel Costs and Business Cars

Deductible expenses are costs arising from transactions that reduce a corporation’s net assets and that are related to the business and ordinary and generally accepted, or directly related to revenue (Corporate Tax Act, Article 19). Even an accounting expense is disallowed if it fails these conditions or the law expressly excludes it. Gross income was covered in chapter 2.

1. Typical disallowed items

Disallowed items and income disposition
Item	Reason	Disposition
Corporate tax and local corporate income tax	A tax on income itself	Other outflow
Fines, penalties, administrative fines, surcharges, penalty taxes and enforced collection costs	Allowing sanctions for unlawful acts as deductions would be improper	Other outflow
Upkeep and related costs of non-business assets	No business connection	According to the recipient
Officers' bonuses above the payment standard	Prevents profit being passed on through excessive pay	Bonus
Officers' retirement benefits above the limit	Prevents excessive retirement pay	Bonus
Business car depreciation above the limit	Prevents private use	Retained
Excessive pay to relatives of controlling shareholders, etc.	Overpayment without justification	Bonus

Contractual liquidated damages for delay or damages paid to a counterparty are, unlike fines, deductible in principle, because they are consideration under a contract rather than a sanction. However, the part of punitive damages for intentional or grossly negligent acts that exceeds actual loss is disallowed.

2. Limit on officers’ retirement benefits

If the articles of incorporation, or rules delegated by them, set a standard for retirement benefits, amounts up to that standard are deductible; otherwise the following limit applies (Enforcement Decree of the Corporate Tax Act, Article 44).

Deductible limit on officers' retirement benefits (no provision in the articles)

\text{Limit} = \text{Total pay for the year before retirement} \times 10\% \times \text{Years of service}

Total pay excludes disallowed bonuses and the like, and periods under a year of service are counted in months.

TE’s CEO retired after 12 years of service and received ₩150 million in retirement pay. There is no provision in the articles, and total pay for the year before retirement was ₩100 million. The limit is ₩100 million × 10% × 12 = ₩120 million, so the ₩30 million excess is disallowed and disposed of as a bonus. The CEO pays employment income tax, not retirement income tax, on that ₩30 million.

3. Business passenger cars

Passenger cars in the corporation’s name (other than commercial vehicles in businesses such as transport) are subject to special rules to prevent private use (Corporate Tax Act, Article 27-2).

Depreciation is compulsorily straight-line over a five-year useful life.
Depreciation is deductible only up to ₩8 million a year. The excess is disallowed (retained) and carried forward to be deducted in later years within the ₩8 million limit.
Expenses are recognized in proportion to business use only if the car is covered by business-only car insurance and a driving log is kept. Without a log, related expenses (depreciation plus running costs) are treated as business use only up to ₩15 million a year.

If TF bought a business car for ₩100 million at the start of 2026 and business use is 100%, tax depreciation is ₩100 million ÷ 5 = ₩20 million. The ₩12 million above the ₩8 million limit is disallowed (retained). Even if the company depreciated over a different life for accounting, tax recalculates on a five-year straight-line basis.

4. Non-business expenses and assets

If a corporation acquires or holds non-business real estate, paintings and antiques, or assets for the CEO’s personal use, their upkeep and related costs are disallowed. Where there are non-business assets or provisional payments to related parties, a matching proportion of interest on borrowings is also disallowed (chapter 8).

Check your understanding

TG’s income statement for the period includes: income tax expense of ₩20 million; ₩3 million of liquidated damages for a delay in a contract with a customer; a ₩1.5 million administrative fine for breaching industrial safety law; and ₩16 million of depreciation on a business car (cost ₩80 million, depreciated by the company on a five-year straight-line basis, 100% business use, driving log kept). What tax adjustments and dispositions are needed?

The ₩20 million of income tax expense is disallowed (other outflow). The ₩3 million of liquidated damages is contractual compensation and deductible, so no adjustment. The ₩1.5 million fine is disallowed (other outflow). Of the ₩16 million of car depreciation, the ₩8 million above the ₩8 million limit is disallowed (retained). Total disallowances are ₩29.5 million.

References

Corporate Tax Act, Article 19 (scope of deductible expenses), Article 21 (disallowance of taxes and public charges) and Article 27-2 (special rules disallowing expenses related to business passenger cars) — Korea Law Information Center
Enforcement Decree of the Corporate Tax Act, Article 43 (disallowance of bonuses, etc.) and Article 44 (disallowance of retirement benefits)
National Tax Service, Guide to Corporate Tax Returns