Understanding the allowable business expenses recognized by IRAS (Inland Revenue Authority of Singapore) can help you save significant money, especially when starting a business. This guide provides an in-depth look at how to maximize these deductions, ensuring every dollar spent supports your company’s growth and success.
By familiarizing yourself with the allowable business expenses, you can significantly plan your corporate business tax and maximise your tax benefits, freeing up more resources for reinvestment. From daily operational costs to employee salaries and software purchases, knowing what qualifies can lead to substantial tax savings.
General Guidelines for Claiming Allowable Business Expenses
- Expenses Must Be Incurred
A business expense is considered “incurred” when the legal obligation to pay arises, even if the payment is made at a later date. - Expenses Must Be Business-Related
You must demonstrate that the expense was necessary to generate income for your business. Only business-related expenses are eligible for deduction. - Personal Expenses Are Not Allowable
Any expenses that are personal or private in nature cannot be claimed as business expenses since they do not directly contribute to your business operations. - Capital Expenses Are Excluded
Capital expenses, such as the purchase of fixed assets like machinery or equipment, are not deductible as business expenses. However, you can claim depreciation on these assets as capital allowances. - Proper Documentation Is Required
All claimed expenses must be supported by complete and accurate source documents, such as invoices and receipts, which should be retained for at least five years for verification purposes.
What Are IRAS-Recognized Allowable Business Expenses?
Allowable business expenses reduce your income and lower your tax obligations. Below are key categories you can claim as a small business:
1. Staff Costs
You can deduct salaries, bonuses, directors’ fees, CPF contributions, and training expenses, provided they are incurred exclusively for income production.
2. Rent and Utilities
Office rent, utilities (electricity, water), and other necessary facility costs are fully deductible.
3. Advertising and Publicity
Marketing and promotional expenses, such as advertising campaigns and public relations activities, can be claimed as deductions.
4. Depreciation and Amortization
Depreciation on assets like machinery is deductible, while amortization covers intangible assets like patents and copyrights.
5. Professional and Legal Fees
Fees for legal, or business consultancy, accounting and audit services are deductible as long as they are essential to running your business.
6. Maintenance and Repairs
Routine maintenance and repair costs for equipment and property are deductible. Major renovations, however, are capitalized.
7. Travel Expenses
Business-related travel expenses, including airfare, accommodations, and transportation, can be deducted from your taxable income.
8. Research and Development (R&D)
If your business undertakes R&D, you may qualify for enhanced tax deductions. Don’t overlook this valuable tax benefit!
9. Insurance
Insurance premiums for business-related coverage, such as professional indemnity and worker’s compensation, are deductible.
10. Bad Debts
Bad trade debts are deductible if they were previously included in taxable income and are proven unrecoverable.
11. Miscellaneous Expenses
Other necessary expenses such as subscription fees for professional publications and membership fees are also deductible.
Certificate of Entitlement (COE) for Motor Vehicles
Capital allowances are not granted for private cars (S-plated), RU-plated cars, and company cars (Q-plated or S-plated), except when these vehicles are registered as “private hire cars” or “cars for instructional purposes” and are actively used for providing driving instruction or hiring out in the course of business operations.
However, motor vehicles such as vans, lorries, and motorcycles that are acquired for business use are eligible for capital allowances under Section 19 or 19A of the Income Tax Act.
When claiming capital allowances, the cost of obtaining a Certificate of Entitlement (COE) for an eligible business vehicle is included as part of the vehicle’s acquisition cost. If the COE is renewed for an existing vehicle, the renewal cost can also be added to the vehicle’s total cost for claiming capital allowances. However, if the COE is obtained but no vehicle is acquired, no capital allowance will be granted for the COE expenditure.
Renovation or Refurbishment Works Expenditure (Section 14N)
To help businesses, especially SMEs, manage costs, qualifying Renovation or Refurbishment (R&R) expenditure is tax-deductible under Section 14N of the Income Tax Act, provided the R&R works do not affect the structural integrity of the premises.
Tax deductions on R&R expenses are capped at $300,000 for every three-year period. For sole proprietorships, this cap applies at the individual level, regardless of how many businesses are owned. For partnerships, the cap applies at the partnership level.
Claiming Section 14N Deduction
To claim this deduction, include the amount under “Allowable Business Expenses” in your 4-line statement in Form B (Self-Employed) or Form P (Partnership).
While supporting documents are not required to be submitted with your tax return, businesses must retain the following for at least five years:
- An itemized list of renovation/refurbishment works and related costs
- Confirmation that the works do not require approval from the Commissioner of Building Control
- Invoices and payment details
Research & Development (R&D) Expenditure
Only businesses that are the beneficiaries of R&D activities can claim R&D tax deductions. A business qualifies as a beneficiary if:
- It bears the financial burden of conducting the R&D activities
- It owns and has the right to commercially exploit the resulting intellectual property or know-how
Businesses primarily engaged in providing R&D services cannot claim R&D deductions unless the R&D is conducted for their own benefit.
Claiming R&D Tax Benefits
To claim an R&D deduction, include the amount under “Allowable Business Expenses” in your 4-line statement in Form B (Self-Employed) or Form P (Partnership).
For businesses with revenue exceeding $500,000, a breakdown of R&D expenditures, along with certified accounts and tax computations, must be submitted with the tax return.
Key Strategy: Review and Apply Allowable Business Expenses Regularly
Proper application of allowable business expenses not only ensures tax compliance but is a key financial strategy. Regularly reviewing these guidelines keeps your business financially healthy, allowing you to make educated decisions that directly benefit your bottom line.
Examples of Disallowable Expenses
While maximizing allowable deductions is essential, it’s also important to know what you cannot claim:
- Personal or domestic expenses (e.g., home repairs, groceries)
- Capital expenses (e.g., buying fixed assets, setting up a company)
- Private car expenses (unless the car is a registered business asset)
- Fines and penalties
- Entertainment expenses (unless exclusively for employee welfare)
Penalties for Errors in Tax Returns
Under the Income Tax Act 1947, taxpayers may face the following penalties for submitting incorrect tax returns:
- Errors Due to Negligence or Lack of Reasonable Excuse
- A penalty of up to 200% of the tax amount undercharged
- A fine of up to $5,000
- Imprisonment for up to three years
- Errors Due to Intentional Tax Evasion
- A penalty of up to 400% of the tax amount undercharged
- A fine of up to $50,000
- Imprisonment for up to five years
Maximize Your Tax Deductions and Business Profitability
By claiming allowable business expenses, such as rent, salaries, and R&D costs, you can substantially reduce your taxable income, leading to increased profitability. Stay compliant with IRAS regulations, and engage a professional accounting firm in Singapore like AG Singapore to ensure you’re maximizing every possible deduction for the success and sustainability of your business.
