What expenses are recognized in Israel?
You have a business: Hevra Baam, an Ossek mourche or an Ossek Patour! What expenses are recognized in Israel? How can I legally pay less tax?
This guide is divided into three parts.
- The first part deals with the point at which a business expense is recognized as a tax expense.
- The second part deals with the percentage of VAT that can be deducted from the invoice amount.
- The third section details common business expenses.
Part A: An expense recognized for tax purposes.
Definitions and explanations: 1. Expenses recorded
- Expenditure required to generate income from current expenses or resulting from depreciation of fixed assets. There may also be additional expenses that reduce taxable income, such as pension fund deposits and occupational disability insurance.
2. Expenses recognized only in part
- the general income tax code defines certain types of expenses. Even if you have incurred business expenses, they may not be recognized in full, but only in part. For each type of expense, detailed instructions have been defined concerning the recognized portion and the excess portion. (not recognized).
These expenses include: car expenses (45% recognized and 55% unrecognized), cell phone (50% recognized), foreign travel, Eshel (per diem), refreshments, gifts and business clothing.
3. Mixed expenses
- expenses used for both professional and private reasons.
The rule is whether the 2 parts can be separated. If such a separation cannot be made, the expense is not booked.
4. Punitive expenditure
- any expenses of a punitive nature (such as fines, penalties, etc.) are not recognized.
5. A distinction between current and capital expenditure (fixed assets)
- current expenditure is expenditure to maintain existing assets or for the day-to-day running of the business.
Capital expenditure (tangible fixed assets) is expenditure that is intended to serve us for several years. For example, the purchase of a computer, a car, etc.
They generally represent a substantial amount. This type of expenditure is accounted for through a mechanism known as "book depreciation".
The Income Tax Ordinance specifies a certain percentage of depreciation for each type of fixed asset.
- IT depreciation is 33% per year.
- depreciation of office furniture of 6%.
- The depreciation of an office / commercial premises is between 2% and 6%. (The land portion cannot be depreciated).
If you have other assets that require depreciation, please contact us to find out the authorized depreciation rate in Israel.
6. Withholding tax -
There are certain expenses for which you must deduct tax at source if you wish to claim it as a recognized expense.
The most common example concerns rental costs
. If the owner of the property does not provide you with a withholding certificate and you do not deduct it in accordance with the rules set out in the ordinance, the tax authorities in Israel will not recognize you in the expense.
Rent for residential property is not a recognized expense in Israel, with certain exceptions. 7. Payment in tax year
- the expense must be paid in the tax year in which it was incurred, if your accounting is on a cash basis. Cash basis accounting means recording expenses only if they are actually paid.
This method is used by professionals and companies with no inventories. It is therefore often advisable to "make" expenses at the end of the tax year rather than at the beginning of the following year, as this will significantly reduce your taxes. The more expenses you have recognized in Israel, the lower your accounting profit will be, and the lower your tax/social security contributions will be.
8. Excess expenditure -
The tax inspector has the option of disallowing certain expenses, claiming that they were excessive (article 30 of the Income Tax Ordinance). For example, recognizing the cost of a top-of-the-range vehicle for a business activity that does not require such a vehicle.
Food for thought :
- Are vehicle expenses recognized when you do business mainly abroad?
- Can you recognize foreign travel if all your customers are in Israel?
- Can you renew your company's equipment if it still has depreciation?
Part B: the percentage of VAT that can be deducted from the tax invoice in Israel.
Let's start by pointing out that the VAT rate in Israel is 17%.
The percentage of Maam (VAT in Israel) that can be deducted from the invoice makes no difference whether the expenses are current or fixed assets.
When examining the percentage of VAT that can be refunded, the following questions need to be answered:
Is it a tax invoice? (חשבונית מס) If it's not a tax invoice, there's nothing to refund.
For example, municipal taxes, bank charges, insurance, employee salaries etc... do not meet this criterion. There is therefore no VAT to recover on this type of expenditure.
Is it an expense or a fixed asset that prevents VAT from being reclaimed? The most common example is the fact that VAT cannot be reclaimed on the purchase of vehicles - with a few exceptions (cabs, transport companies, scooters and certain motorcycles, etc.).
Is the tax invoice in your name? (Except for expenses incurred while working at home, which can be registered in the owner's name).
. Does the tax invoice concern a transaction with exempt VAT or with a VAT rate of 0%?
- VAT-exempt transactions - bank charges, renting an apartment for residential purposes etc...
- Transactions with a VAT rate of 0% - unprocessed fruit and vegetables, export of goods, expenses incurred in Eilat / abroad etc...
Does the tax invoice concern a benefit your employee received from you? For example, you may have offered your employees a vacation, or you may have provided lunch at the workplace. In such cases, it is forbidden to deduct VAT on these expenses.
. Primary use check - What is the primary use of the expense?
for professional or private purposes?
If the use is mixed (professional and private )but the main use is for commercial purposes, you can reclaim 66.67% (2 thirds) of the VAT amount on the invoice.
If the main use is for private purposes, you can only reclaim 25% of the VAT amount on the invoice.
The main cases you'll come across are: car maintenance and cell phones.
The non-recovered VAT will be added to the amount of the expenses.
Example: your cell phone bill is 100 Nis and the main use is for business purposes.
In this bill there is 14.53 Nis of VAT (100/1.17= 85.47 * 0.17 = 14.53 Nis).
You can therefore reclaim 66% of this amount, i.e. 9.59 Nis of VAT. The remaining 90.41 Nis (100-9.59) will be recognized as an expense. (see part A above).
7. If you have passed the six tests above, you can deduct 100% from the VAT amount on your tax invoice. Important
As each company has its own type of expenses, it is not possible to draw up a closed list of "expenses recognized in Israel".
A business owning a yoga studio, over and above the usual expenses listed in this guide, will have additional expenses such as: mattresses, purchase of towels, purchase of candles and incense, decorations etc...
As a result, this guide gives general guidelines, and each business owner will add the expenses that are specific to his or her activity.
ALSO READ: The guide to doing business in Israel.
Part C: What expenses are recognized in Israel?
Having a business in Israel (Hevra Baam, Ossek mourche or Ossek Patour) requires knowing what types of expenses you can recognize?
Learning English, placement in a fond (keren Ishtalmout), website creation: Did you know that these expenses can be considered a recognized expense in Israel? What are the expenses to be taken advantage of before the end of the year? Various types of expenditure are permitted for companies in Israel. Follow the Guide.
Every business owner in Israel knows the word "expense", but few really know what it means.
For example: Lunch at a fancy restaurant with your partner. Can you record your payment as a recognized expense?
You traveled to New York with your partner and, while in the city, had three business meetings. Will the Israeli tax authorities recognize all your travel expenses, including plane tickets and hotel accommodation?
What about expenses paid for your spouse?
Most of us are familiar with some kinds of expenses and others less so. Did you know, for example, that stealing cash from the cash register can be considered a recognized expense?
Just before the end of the year, we've put together a number of well-known expenses that you should take advantage of if you have a business in Israel:
Working from home in Israel.
More and more people are working from home, mainly professionals such as salespeople and architects.
Even professionals with a rented office prefer to work a large part of their time at home, to save on travel time and enjoy the atmosphere of home. The principles of accounting for tax charges do not change when it comes to working from home.
You just have to make sure that these expenses meet the usual criteria for recognized expenses.
In addition, it must be demonstrated that it is possible to clearly separate business expenses from those used for private purposes.
The separation between the part used for housing and the part used for business needs can be clearly made by assigning a part of the house to business use - such as a basement, attic or particular room. Separation will be easier when it's a section that has a separate entrance and is closed off from the residence.
LIRE AUSSI: Expenses recognized from home
Making rent a recognized expense in Israel
It is possible to claim the rent for the part of the residential house used for business purposes as a recognized expense.
It should be remembered, however, that rental costs will be recognized as an expense for the tenant. only if the owner also recognizes this income as commercial income
. To do this, he will have to give you an invoice and open a tax file with the tax authorities in Israel.
This means that it's often impossible to pass on the rent, as the landlord will certainly not take the steps explained above.
ALSO READ: How do you calculate tax on property income in Israel?
Purchasing equipment for a company
The purchase of business equipment and furniture entitles you to depreciation. Recognized depreciation will be calculated in accordance with the standard provisions for calculating depreciation on business equipment and furniture, i.e. 7% of the purchase price of furniture, such as tables, chairs and bookcases, up to 15% for air conditioners, fax machines and photocopiers.
Personal computers, including mobile devices, are entitled to an annual depreciation of 33% of the purchase price.
Keep in mind that, as with any other business asset, profits from the sale of equipment will be subject to capital gains tax.
Maintenance costs for your commercial premises
While the costs of acquiring or building your commercial premises will be recorded as depreciation expenses only, maintenance costs will be recorded as expenses in the current year.
Maintenance expenses generally include: painting, repairs, housing committees (Vaad Bait), municipal taxes, cleaning products, etc.
Office supplies, magazines and software
Office supplies such as filing cabinets, photocopier paper and printer toner are recognized as tax-deductible expenses. Office equipment intended to generate long-term business income, such as computers, is an asset whose acquisition costs will be recognized in accordance with the rate of tax applicable. amortization
determined by regulations.
Expenditure on the purchase of magazines or newspapers for income generation and private use is not recorded at all, as it is a mixed expense. Unless you can distinguish between the part for commercial use and the part for private use. (On the other hand, a professional magazine related to your sector of activity will be recognized as a deductible expense in Israel).
Expenses related to the acquisition of professional publications and computer software will be recognized as expenses in Israel when they are related to the business sector and intended for short-term use.
Where these expenses have been incurred prior to the start of the business or for the purpose of generating long-term income, they will be accounted for at the depreciation rate determined by regulations.
For cell phones - since part of the usage is mixed, private and professional. The bill will be recognized at 50% as a business expense.
For a landline telephone - if there are two separate telephone lines for private and business use, all business expenses are charged to the business line.
When your business is located at home, electricity expenses are deductible, provided that the portion of the entire dwelling used to generate income can be identified. This can be done by means of a reasonable calculation (proportional to the number of rooms in the house, for example) or by installing a separate electricity meter for the part used to generate income.
Arnona - Municipal taxes in Israel
Where it is possible to identify the income-generating part of the dwelling (as opposed to the part used for private purposes), such as a workroom or basement used solely for commercial purposes. Arnona expenses attributed to the business segment are recorded as a deduction.
Since the basis for calculating municipal taxes is based on a rate per m², it is possible to measure the portion of the total surface area of the residential structure used to generate income, and to record the municipal tax payment corresponding to this portion as a recognized expense.
Salaries for parents and spouses
Income tax makes it very difficult to account for salary expenses paid to family members, especially spouses, who work in the business they own. Not only are salary expenses not always recognized, but the tax on their income is calculated on a consolidated basis and is relatively high for spouses who do not work in the same place.
This position of the Israeli tax authorities runs counter to the Supreme Court's ruling that spouses are entitled to separate tax calculations even if they work together. According to the Court's position, fear of cheating cannot automatically invalidate separate tax calculation for spouses working together.
If you pay a salary to your spouse, we recommend that you follow a number of rules to help you justify this salary in the event of a tax audit. Contact us for more details.
ALSO READ: How are taxes calculated in Israel?
For the trip to be recognized as a business trip, it must be proven that it was necessary for the generation of income, including regular updates, in order to maintain the current state of your business.
All evidence that it was a business trip, including tickets to the trade show in which you took part, records of business meetings, etc., must be kept.
Regulations, which deal with the accounting of travel expenses as a recognized expense, allow additional passengers, such as consultants, interpreters and media consultants to travel, if it is possible to clearly identify the expenses related to the business part of the trip.
Foreign trips that are primarily for private purposes and related expenses, such as air tickets, may not be recognized as an expense by the Israeli tax authorities.
ALSO READ: Are foreign trips a deductible expense in Israel?
Setting up a website
It's a complex matter. In a circular issued at the end of 2002, the Israeli tax authorities determined that expenses related to the creation of a website should be amortized over four years, in the same way as computer equipment (25% or 33%).
However, this item only applies to the costs of setting up websites for internal use or as a substitute for setting up a tangible branch, but not when the costs of setting up the site are intended to develop an additional marketing channel for the company, replacing existing marketing channels.
Where a website is a marketing channel, it is now possible - according to the Supreme Court's decision - to recognize all the costs of setting up the site as current expenditure recognized in the financial year in which they were incurred.
Accounting for website expenses can be divided into several areas: 1
An expense for the acquisition of a domain name is fully recognized when the domain name is identical to the commercial organization's ordinary trade name. However, when the expense concerns the purchase of a new trade name, it is a capital expenditure that will not be recognized at all, except when it is realized.
. Costs related to the creation of a website for intra-organizational use or as a new branch will not be recognized as an expense, but only as amortization expense over four years.
The cost of creating a marketing image website (a boutique or e-commerce site) is recognized as an advertising expense in the year in which it is incurred.
Website advertising costs will be recognized in accordance with the criteria for accounting for advertising costs. This means that advertising for a new business or sector of activity will only be recognized when this new activity generates profits.
The actual operating costs of a website are recorded expenses, including site maintenance costs, payments to Internet service providers, communications, site storage, annual services and so on.
. The cost of upgrading the site will be accounted for as a current expense or as a capital expenditure, depending on the accepted tests for accounting for the ownership of other machinery and equipment. Thus, if the upgrade is intended to maintain the site's level in line with the current market, the expenditure will be recognized as an expense in the year of the upgrade. If the upgrade will enable the site to maintain its level for several years, the expense will be recognized as depreciation in future years.
According to the Israeli tax authorities, restaurant meals are not a recognized expense in Israel.
Unless you can prove that the meal is for business purposes.
Example of an expense that can be recognized:
ALSO READ: Expenses in Israel - Restaurants
- Lunch with a banker,
- Business lunch with a supplier,
- Invite your customer to a restaurant,
- Lunch at a meeting with a remote business partner located halfway in an area convenient to both parties. (You're in Tel Aviv, your supplier is in Eilat. You can invite him or her to lunch midway).
Investing for retirement and savings
Pension contributions, Keren Ishtalmout, Investment funds, Koupat Guemel... provide taxpayers with substantial tax breaks.
Given the diversity of existing contributions, many taxpayers are unaware of the various advantages.
Click to see the main information on these benefits, whether you are employed or self-employed.
Learn English and computers
Given the pace of technological development, it seems that training and education are necessary. The Court has recognized the costs of training courses, such as English and IT, as recognized expenses. As long as these expenses are small training courses lasting a few hours and not diploma studies per se.
Diploma and Master's degree
Expenses for first degree or master's studies are not included.
However, the Israeli tax authorities grant additional tax credits for holders of a diploma or master's degree.
It is possible to have study expenses recognized, depending on the circumstances and needs of the company, on condition that the employee is taxed on the amount of this "benefit in kind".
Theft of cash, cashier's items or cheques may constitute a recognized expense. However, theft of property, such as machinery and equipment, is not immediately recognized. Damage caused by theft will only be recognized as a capital loss, which can be offset against capital gains from the sale of other company assets, not against current profits. This is true even when the thieves are company employees.
Many employees spend money on work out of necessity, such as the desire to learn and keep up with their profession when the employer doesn't want to fund the expenses, buy office supplies, use the Internet, etc.
The Israeli tax authorities expressly allow recognized expenses to be deducted from all taxable income, including that of employees. Consequently, there is nothing to prevent employees' business-related expenses from being booked as business expenses.
ALSO READ: Can I deduct expenses from my salary in Israel?
There is no clear provision for recognizing the payment of extortion fees to criminal entities as tax-deductible expenses. However, it was decided that the court would not favor extortion by recognizing extortion payments.
However, in the past, taxpayers have asked the court to recognize extortion payments as a tax expense, and they have not been rejected.
When corporate officers commit offenses, they can also face criminal charges.
It is possible that the legal fees paid by the Company may be recognized as a tax expense. Recognition will only be made if it can be proved that the employee is a senior officer of the Company and that his or her injury, reputation or loss of freedom will be detrimental to the Company.
Consequently, only the cost of legal protection for senior executives will be recognized as a tax expense.