Claiming expenses – an overview
One of the frequently asked questions is what expenses a business can claim so as to reduce the tax bills. This is for both income tax (and by extension Bituach Leumi) and ma’am purposes (for osek morshe only).
The basic rule is that you claim any expense that is wholly and exclusively for the purposes of generating income. This applies both for Ma’am and Mas Hachnasa purposes.
There are some situations in which this will be obvious. Examples include professional licences/memberships and insurances, office rental, salaries / freelance outsourcers etc. But of course, there can be other situations whereby the situation is not so clear cut. This post will set out some of the more common situations.
As a general comment, you can only claim Ma’am on expenses if you have a tax invoice (חשבונית מס) from your supplier. Without such a document, you cannotclaim the expense.
Furthermore, on your VAT return, the expenses are split between “fixed assets” and “other expenses”. Fixed assets are expenses that will be used in the business for a prolonged period, and an unlikely to recur on a regular basis. Examples would be computers, equipment etc. The VAT on fixed assets can be claimed in full in the period in which the invoice was issued.
The main complication comes with expenses that have both private and business uses. The VAT rules state that in such a situation, you can claim 25% of the VAT for an expense which is primarily private and 2/3 (66.67%) of the VAT for expenses which are primarily for business.
Cars – VAT cannot be claimed whatsoever on either the purchase or the rental of a car. For ongoing expenses (gas/petrol, repairs etc.), you can claim 25% of the VAT. For those using cars a lot for business (usual test is if the car is being driven at least 36,000 km in a year), 2/3 of the VAT can be claimed.
Telephone/Cellphone – It is generally assumed that these are used primarily for business and so 2/3 of the VAT can be claimed.
Home expenses – If you are working from home, you can claim VAT on your ongoing house expenses (e.g. electricity, water, gas etc.), but only 25% (as these are primarily private expenses).
Mas Hachnasa (Income Tax)
For income tax (and be extension, Bituach Leumi) purposes, any VAT claimed is not included in your expenses.
Fixed assets – the total cost cannot be claimed in the year in which the monies are paid out. Rather, the tax office has issued guidelines as to how many years the expense is spread over. This spreading is known as depreciation (פחת). For example, computers are depreciated at 33% per annum, cars at 15%, electronic equipment at 7% etc.
Cars – the rule of thumb is that only 45% of the expenses (including depreciation of the cost as well as the licence and insurances) can be claimed. There are exceptional circumstances where the rules are different, but these are rare.
Telephone – the first NIS 2,300 of expenses are considered private expenses. Any excess above that amount can be claimed. In practice, most home lines do not get to this level.
Cellphone – 50% of your monthly bill – up to NIS 105 per month – is considered private use. The rest can be claimed.
Home expenses – In general a percentage of the home expenses is claimed based on the proportion of the home being used for business. This is often 20% or 25%, but could be lower, depending on the situation.
Entertainment – The general rule of thumb is that entertaining of clients is not an allowable expense. The exemption is entertainment of foreign clients – but this can be difficult to prove (can you get copies of passports of your guests? And a photograph to prove that they were at the table when the bill was issued?!)
Office refreshments – e.g. tea & coffee for employees. 80% only of the cost can be claimed.
All of the above applies where the business is the only source of income. In other circumstances, it is often required to claim fewer expenses. As always, it is best to get professional advice for each individual situation.