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November 7, 2022
Everything You Need to Know About Deductible and Non-Deductible Expenses
A complete report of business expenses is expected when filing for corporate income tax in Singapore, as the Inland Revenue Authority of Singapore mandated. This covers resident and non-resident enterprises and requires them to declare all they have spent managing and growing their businesses. The declaration should include payments for advertising, renovation, wages, and CPF contributions, to name a few. But it is not something that you should be worried about. Do you want to know why? The IRAS does not allow deductions on all you have spent on your businesses. You are obliged to separate corporate costs into deductible expenses and non-deductible expenses. If you want to learn everything related to business expenses, specifically deductibles and non-deductibles, continue reading this article.
Check out more details regarding deductible and non-deductible expenses in Singapore below. The information is sourced from IRAS, meaning this content is reliable and created with business owners in mind.
What Does Tax Deductibility of Expenses Mean?
Before we delve deeper into the criteria of deductible and non-deductible expenses, let us take time to understand when taxes are charged on business expenses. To clear the air, tax-deductible or deductible expenses are business costs that IRAS allow for deductions from earned income, thus reducing a Singaporean company’s taxable income. In other words, the tax-deductible expenses would lower taxes to be paid.
Meanwhile, non-deductible expenses are not part of an enterprise’s income tax bill. To be more exact, non-deductible expenses are to be added back to your taxable income if you have accounted for them in your financial statements. The IRAS disallows the deduction of these business expenses and you will not be able to enjoy deductions from your taxable income.
For example: If your company’s annual income is S$100,000.00 and it declares business expenses with an amount equivalent to S$20,000.00 (with S$15,000 deductible expenses and S$5,000.00 non-deductible expenses), then the taxable corporate income will be S$85,000.00. To achieve this, you must subtract the S$15,000.00 deductible expenses from S$100,000.00 of your annual income.
Understanding Deductible Business Expenses
Now that you have a good grasp on the overview of what expenses are charged taxes on by IRAS, it is the right time to dig a bit deeper into what qualifies as deductible expenses. In case you are hesitating about what you declare your company’s deductible expenses, here is the cardinal rule. According to IRAS’s published policy on business expenses, deductible expenses encompass costs that entirely and exclusively incur from all the company’s income-generating activities.
Note the accompanying conditions of deductions for business expenses from the list as follows:
- Singapore’s Income Tax Act should not prohibit the deduction of the deductible business expenses
- The expenses must be generated from the revenue and not business capital
- No contingent liability of expenses, which means they should be incurred without the need to peg them on situations that may or may not happen in the near future
- All expenses must be incurred purely for the sole purpose of generating business income
Understanding Non-Deductible Business Expenses
On the other hand, non-deductible business expenses are the direct opposite of deductible expenses. In short, the costs to be categorised as non-deductible should be incurred outside income generation. What exactly does it mean? Capital expenses like the funds spent on fixing assets, company incorporation, and personal expenses incurred by employees, including entertainment and travel costs, are considered non-deductible expenses.
Deductible Expenses For Business
- Accounting fees
- Administrative expenses
- Advertisement costs
- Auditors’ remuneration
- Ad-hoc contributions to employees’ Medisave accounts
- Bank charges
- Cash spend in topping-up of Employees’ CPF Minimum Sums
- Costs for periodicals and newspapers
- Digital taxes imposed through turnover taxes (not income taxes)
- Directors’ fees
- Employee Equity-Based Remuneration (EEBR) Scheme payments
- Employee’s income tax paid by the employer
- Employment Assistance Payment (EAP)
- Exchange loss (trade and revenue in nature)
- Insurance costs for underwriting bad trade debts
- Interest expenses
- Interest incurred on late payment of fees to a Management Corporation for a Strata Title Plan (MCST)
- Interest incurred on loans intended for re-financing previous loans or borrowings
- Intellectual property (IP) licensing expenditure
- Legal and professional fees incurred in trade and revenue transactions
- Medical expenses
- Motor vehicle expenses – including upkeep, maintenance, plus running and financing costs of goods / commercial vehicles
- Office upkeep expenses
- Payments for Insurance premiums
- Statutory CPF contributions
- Voluntary cash contributions to self-employed persons’ Medisave Account
Non Deductible Expenses For Business
- Acquiring fixed assets
- Bad debts (non-trade debtors)
- Bills before the commencement of business
- Certificate of Entitlement (COE) for motor vehicles
- Digital taxes imposed as income taxes
- Dividend payments made on preference shares
- Exchange loss (non-trade or capital in nature)
- Goodwill payments
- Impairment loss on non-trade debts
- Interest incurred on late CPF contributions
- Interest expenses on non-income-producing assets
- Legal and professional fees for non-trade or capital transactions
- Motor vehicle expenses for S-plated and RU-plated cars
- Voluntary contributions to CPF
- Singapore’s income tax and any tax on income in a country outside of Singapore
- The installation of fixed assets
These are only a few of the costs under deductible and non-deductible business expenses. Should you wish to find the complete list, visit IRAS official website.
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