To run a business effectively, the owner needs to make certain changes, adaptations, and improvisations from time to time. These changes give rise to expenditures. Apart from these, businesses also have to bear certain fixed costs. So, business expenses are those that one needs to pay for running the business smoothly. While preparing the annual returns, most organizations calculate their expenses that encompasses all the business expenditures, fixed or variable, to make sure that the total income is minimized.
However, most of our expenditures cannot be recognized as deductible expenses. Before discussing the list of deductible or non-deductible expenses, you should know the basic difference between the two.
So, all the expenses that can be deducted from a business’s income before it is subjected to taxation are known as deductible expenses. Whereas all the expenses that cannot be subtracted from a business’s income before taxation are known as non-deductible expenses.
Deductible expenses help in reducing one’s tax liability. A non-deductible expense, on the other hand, does not affect your tax bill. Expenses that are always deductible include investment losses, charitable contributions, etc. A business can claim a tax deduction only if the expenses are exclusively and wholly incurred in income production. Still there, are some complexities to comprehend the distinguishment in expenses.
For expenses to fit into the category of deductible expenses, it needs to satisfy the following conditions:
- Expenses that are solely incurred in the production of income.
- Expenses that are not a contingent liability, i.e. it is not dependent on any event that may or may not occur in the coming future. In other words, expenses must be incurred. An expense is said to be 'incurred' only when the legal liability to pay such expense has arisen, regardless of the actual payment date.
- Expenses that are revenue, and not capital, in nature.
- Expenses that aren’t specifically prohibited from deduction under any provisions of the Income Tax Act.
Non-deductible business expenses are those which do not fulfill the above-mentioned conditions. This includes your personal expenses like travel, leisure, entertainment, basically that are not related to the running of your business, and capital expenses that are expenses incurred for incorporating a company’s purchase of fixed assets. A vast majority of your personal spendings are non-tax-deductible. The tax authority considers does not consider natural expenditures in favor of a reduction in the amount of money you are having at your disposal. Deductible expenses, for example, a loss resulting from office embezzlement or stock trading, for instance, are considered to actually reduce the amount of income you effectively earn, thereby resulting in a lower base of tax.
Several expenses can be deducted from your income only under specific cases. Like, money spent on clothing expenses is deductible, only up to a certain specified limit, if it can be deemed a business expense. Healthcare spending is a deductible expense, only up to the extent where it doesn’t exceed 7.5 percent of your adjusted gross income. The canvas, brushes, and oil you purchased for your paintings are deductible only if you can demonstrate that you were treating the art of painting as a money-making venture and not a hobby, for instance.
Therefore, tax-filers usually must necessarily go through the relevant section of the tax code or consult a professional tax accountant before they can actually determine if a particular expense is deductible or not.
Note that even if you have deductible expenses, itemizing your deductions is crucial before subtracting these from your actual taxable income. For individual filers, this implies filling out Schedule A, where you are required to list and add up all of your deductible expenses for the financial year you are filing the return for. The Internal Revenue Service of Singapore permits you to take a “standard deduction” if you have decided not to itemize your deductible expenses.
The standard deduction assumes that even those filers who don’t wish to take the time and effort for itemizing deductions will most likely have deductible expenses and allows them to reduce their gross income by some standard amount depending upon their marital status and age. It is an extremely convenient solution for those filers whose itemized deductions would fall below or only slightly exceed the standard deduction.
Let’s consider certain examples of Deductible and non-deductible expenses.
- Accounting fee
- Auditors' remuneration
- Directors' fees
- Exchange loss (revenue and trade in nature)
- Exhibition expense
- Printing and stationery
- Provision for doubtful and bad debts
- Staff training
- Employee Equity-based Remuneration (EEBR) Scheme
- Administrative expenses
- Directors' remuneration
- Employment Assistance Payment (EAP)
- Periodicals & newspapers
- Property tax
- Provision for obsolete stocks (specific)
- Staff Welfare/Benefits
- Statutory and regulatory expenses
- CPF, foreign workers' levy, skills development levy
- Secretarial fees
- Stock obsolescence
- Staff remuneration (Salary, bonus, and allowance)
- Supplementary retirement scheme
- Impairment loss on non-trade debts
- Depreciation (you can claim capital allowances in its place)
- Provision of obsolete stocks (general)
- Medical expense (amount exceeding 1%/2% of total remuneration if a company is under PMBS or TMIS
- Motor vehicle expenses (RU-Plated and S-plated cars)
- Ex-gratia retrenchment payments and outplacement support cost, where there is a complete business cessation.
- Bad debts (non-trade debtors)
- Legal and professional fees (capital or Non-trade transactions)
- Dividend payments made on preference shares
- Singapore income tax and any tax levied on an income from a country outside Singapore
- Prepaid expenses (not concerning the relevant basis period)
- Installation of fixed assets
- Certificate of Entitlement (COE) for vehicles
- Interest expenses on non-income-producing assets(Interest adjustment)
- Transport (S-plated and RU-plated cars)
- Domestic and Private expenses (which are not incurred for business purpose)
- Provision for bad and doubtful debts (Note impairment loss on trade)
- Private hire car