Whether your business is registered as an Osek Patur, Osek Murshe, Partnership or Company, at the end of the year you’ll need to calculate your taxable profits and work out how much tax to pay to the Israeli Tax Authority. The higher your taxable profit, the higher your tax bill will be.
So how do you reduce your tax bill? It’s simple – record all your income tax deductible expenses against your income. This reduces your “taxable” profit, and as a result will reduce your tax bill.
What is an income tax expense?
An Israeli business should be able to record its expenses as income tax expenses if it meets all the following criteria:
- The expense is required for the running of the business
- No “private” benefit is derived
- A tax invoice or receipt has been received
It’s important to know that some categories of expenses have their own set of rules and limitations. Additionally, some expenses which don’t meet all the criteria above may still be allowable as income tax deductible expenses. This guide covers the most common types of expenses and their treatment as income tax deductibles.
How to Calculate income tax expenses?
Keeping track and recording your expenses is your first step. So, it’s important to know what expenses you should be looking for in each of the most common tax expense categories as follows:
– Cost of goods for trading
– Rent & maintenance
– Office supplies
– Telephone and communications
– Employee costs
– Professional fees
– Travel expenses
– Equipment and machinery
Most common tax expense categories
Cost of goods for trading
If your business trades goods, the purchase costs of the goods sold, and all associated costs (for example delivery, storage, packaging etc.) can be recognized as an expense.
Rent & maintenance costs of your commercial premises
Rent of a commercial premises which is used for the running of your business can be recognized as an expense against your income. However, you must receive a certificate of the withholding tax authorisation from the landlord and have deducted the correct amount of tax before paying your rent.
If you own your business premises, the costs of acquiring or constructing your premises will be recorded only via depreciation charges, ongoing 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. These would be allowable as income tax deductible expenses.
Office supplies, computer software, subscriptions etc.
Office supplies intended for the daily consumption of the business, such as filing cabinets, sheets for photocopiers, printer toners, are recognized as tax deductible expenses.
Office equipment intended to generate long-term business income, such as computers or machinery are assets whose acquisition costs will not be recognized as an expense. However, their cost is split and deducted in the form of depreciation each year.
Expenses relating to the acquisition or subscription of computer software or other digital services can be recognized as business expenses, provided they are required for the running of the business.
When office expenses were incurred before the registration of the business, they cannot be considered a business expense. However, depending on the circumstances, they may be recognized in the form of depreciation.
Food and drinks for the office such as coffee, soft drinks, and small snacks are allowable as a deductible expense. However, due to the ‘private benefit’ element of these refreshments, only 80% of the expenses are income tax deductible expenses.
Landline phone and internet subscription, the full amount is deductible as an expense.
Cell phones – although its needed for the business, part of the benefit is usually for personal use too. This is what’s called a mixed benefit expense. Therefore, only 50% the invoice will be recognized as a business expense. If you are paying the cellphone bills of your employees, the full amount can be expensed, provided the benefit to the employee is correctly added on their payroll.
Employment & labour expenses
Salaries and related employee costs, including taxes, social security, pension, training and employee attributable benefits are tax deductible expenses.
Pensions & Savings
Pension contributions, Keren Hishtalmut, Kupat Gemel etc. grant taxpayers significant tax reductions.
Faced with the diversity of investment options, many taxpayers do not know the different advantages. It is advised to discuss these benefits with your investment advisor when choosing an investment strategy.
Salaries for family members
As a general rule, a business can employee anyone it wants too. However, the Israeli Tax Authority are skeptical when a business owner has family members on their payroll, as this is sometimes done purely to split the business income between more people and reduce the overall tax.
Income tax rules makes it very difficult to record salary expenses paid to family members, especially spouses, even those who actually work in the business.
If you employ a family member, we recommend that you follow several rules that will allow you to justify this salary during a possible tax audit. Contact us for more details.
Accountancy fees, legal advice and consultancy relating to the business activities are recognizable expenses. If a business is subject to a lawsuit due to its activities, the legal expenses can also be claimed as a business expense.
However, sometimes when a business owner or director commit criminal offenses, they will face criminal charges personally. Recognition by the business of their personal legal fees will only be allowed if the reputation or loss of liberty of the individual will adversely affect the business. Usually, only the costs for the legal protection of senior executives will be recognized as a tax expenditure.
For the trip to be recognized as a business trip, there must be evidence of the necessity to travel for income generation or to maintain the current activities of your business.
All proof that the trip was for business should be kept, including for example entrance tickets to a trade show you attended, records of business meetings, etc.
The allowable expenses for an eligible business trip would include flights, hotel, car rental, sustenance etc.
Foreign travel that is primarily for private purposes and related expenses, such as airline tickets, may not be recognized as an expense by the Israeli tax authorities.
Read: Foreign travel deductible expenses.
Equipment and machinery
The purchase of equipment and furniture for the business will be recorded only via depreciation charges. The recognized depreciation will be calculated in accordance with the standard provisions for the calculation of depreciation of equipment and professional furniture, i.e. 7% of the purchase price of furniture, such as tables, chairs and bookcases, up to 15% for air conditioners and photocopiers.
Computers, including mobile devices, are entitled to 33% annual depreciation on purchase costs.
Keep in mind that like any other business asset, profits from the sale of equipment will be subject to tax
Setting up a website
The treatment for the cost of setting up a website for your business depends on the type of website built. It will either be an allowable expense in the year during which the expense was made, or it will be treated as an asset and recorded only via depreciation charges.
Read: tax treatment of website expenses
Training & courses
Training and courses directly connected to maintaining the business activities are income tax deductible expenses
Studying expenses for a bachelor’s or a master’s degree are not allowable. However, the Israeli tax authorities grant additional tax credits for individuals who have recently completed a bachelor’s or a master’s degree. If paying these expenses on behalf of an employee, it is possible to have the study costs recognized. However, this would be on the condition that the employee will be taxed on the amount of “the benefit in kind”.
The expenses of maintaining a vehicle can include lease costs, gas, insurance, annual road tax, repairs, and parking. The cost of purchasing a vehicle cannot be recognized as an expense. However, it can sometimes be allowable via depreciation.
Whether or not a business can recognize the costs of a vehicle would depend on the use of the car and if there is a ‘private’ benefit involved.
Read: Tax deductible expenses for cars
Entertaining clients, suppliers, or staff for example at a restaurant, are generally not allowable expenses. However, if you meet with a foreign client at a restaurant, the expense can be recognized.
Work clothing is generally not tax deductible. However, if the clothing is required for the purpose of safety or uniform, the expense would be allowable. For example, hi-vis jackets, steel boots and helmets for builders.
If a business purchases normal use clothing for its employees, the business can record the expense only if the ‘benefit in kind’ is recorded on the employees pay slip.
Home Office Expenses
Working from home? You might be able to save more than just the expense of running an office. Working from home requires use of your personal resources. It takes up space in your house, requires higher usage of electricity, gas etc. It is only fair that part of these expenses are allocated to your business and are treated as income tax deductible expenses.
Read: Tax expenses when working from home
After registering a business in Israel, it is important to be aware what is considered an income or expense. Allocating all your expenses correctly can reduce your tax bill significantly. But, if you claim the disallowed expenses, it can cause problems for you in the long run. Start on the right foot, and when you’re not sure, just ask.