Allowable Business Expenses IRAS Approves

What is the Fixed Expense Deduction Ratio (FEDR) for self-employed individuals?

Simply put, these are costs you incur directly while running your business. This is one of the allowable business expenses IRAS enlisted, which can reduce your taxable income and, in turn, your taxes.

Allowable business expenses IRAS enlisted for self-employed individuals

• Rent, utilities, and telephone charges: These are essential costs for most businesses.
• Office supplies and stationery: Think pens, paper, printer ink, and other office essentials.
• Staff salaries and benefits: If you have employees, these costs are deductible.
• Advertising and marketing: Promoting your business is a legitimate expense.
• Professional fees paid: Accountants, lawyers, and other consultants can be invaluable.
• Travel expenses: If travel is part of your business, these costs may be allowable.
• Repairs and maintenance service fees paid: Keeping your equipment and premises in good working order is crucial.
• Training and development: Investing in your team’s skills is smart.
• Licensing expenditure: For vehicles used in your business.

Claiming FEDR during tax filing

The Fixed Expense Deduction Ratio (FEDR) simplifies the process of filing income tax returns for eligible self-employed persons (SEPs). Instead of tracking actual business expenses, SEPs can claim a pre-determined percentage of their gross income as expenses.

Here are the steps to follow to file your income tax return with FEDR:

1. Determine Eligibility: Confirm if you qualify as a SEP eligible to use FEDR. You can check the Inland Revenue Authority of Singapore (IRAS) website for the latest information on eligible occupations.
2. Gather Information: Collect your annual gross income details and any other relevant income documents.
3. File Your Return: You can e-file your income tax return through the myTax Portal. The portal will guide you through the process, including calculating your deductible expenses based on the FEDR percentage.
4. No-Filing Service (NFS): In some cases, you might be selected for the No-Filing Service. This means you won’t need to file a return if your income details are pre-filled, and you don’t have any changes to make. You’ll be notified if you’re selected for NFS.

How Iallowable business expenses reduce payable taxes

Now, let’s examine the financials. Suppose your business generated $100,000 in revenue this year. You had $30,000 in allowable business expenses, including costs like rent, utilities, and employee salaries. After deducting these expenses, your adjusted profit and taxable income decrease to $70,000.

With a progressive tax rate of 7% applicable for income up to $70,000, your tax payable amounts to $4,900. However, by claiming those $30,000 in allowable expenses, you have effectively lowered your taxable income, resulting in a tax savings of $2,100.

Effectively tracking and claiming your allowable business expenses is crucial. It enhances your profitability not merely by facilitating smooth operations but also by maximizing the retention of your earnings.

Disallowable business expenses

As a business owner, it’s key to distinguish between tax-deductible expenses and those that are not allowable for deduction. While allowable business expenses reduce your taxable income, certain costs are disallowed even if they directly relate to your operations.

For instance, personal expenses are not deductible. This includes costs such as dinners with friends or personal medical expenses, which cannot be claimed as business expenses. Additionally, capital expenditures like purchasing fixed assets or initial company setup costs are not immediately deductible as business expenses, although capital allowances may be claimed on these types of qualifying expenditures.

Entertainment expenses are another area of common confusion. Expenses incurred while entertaining clients or celebrating with your team generally are not deductible, except when the entertainment is solely for employees as staff welfare, subject to a cap of 1% of the total payroll.

Private car expenses used for business purposes are also non-deductible, as are fines and penalties incurred, such as a speeding ticket received while traveling to a business meeting.

Moreover, contributions to employees’ Medisave accounts under the Additional Medisave Contribution Scheme (AMCS) are commendable but are not deductible as business expenses.

Understanding these regulations is crucial to ensure compliance and avoid the potential pitfalls and penalties associated with incorrect expense claims.

Here are other disallowable business expenses that you can’t claim:

• Personal or domestic expenses (e.g. groceries, home repairs)
• Capital expenses like buying fixed assets, trading stocks, or setting up a company
• Private car expenses (unless the car is registered as a business asset)
• Fines, penalties, and personal income tax
• Cash top-ups to employees’ Medisave accounts under AMCS
• Entertainment expenses (with some exceptions)

The key is to claim only expenses wholly and exclusively incurred in producing business income. Anything personal or not directly related to generating revenue is off-limits.

Key Takeaway:

FEDR helps self-employed people simplify tax filing by letting them claim a fixed percentage of income as business expenses. For commission agents, delivery workers, and taxi drivers, this means no more tracking every single expense.

COE for motor vehicles

When claiming deductions for tax purposes on motor vehicles used in your business, it’s important to understand the rules around capital allowances.

Firstly, capital allowances cannot be claimed on private cars (S-plated), RU-plated cars, or company cars (Q-plated or S-plated), except for vehicles registered as “private hire cars” or “cars for instructional purposes” that are actively used in the business, such as for hiring out or driving instruction.

For other types of motor vehicles, such as vans, lorries, and motorcycles used primarily for business purposes, you can claim capital allowances under Section 19 or 19A of the Income Tax Act.

Regarding the Certificate of Entitlement (COE), the cost of obtaining a COE is considered part of the vehicle cost, which means it can be included when calculating the capital allowance, provided the vehicle is eligible. Similarly, COE renewal fees, which extend the operational life of a business vehicle, can also be included as part of the vehicle’s capital cost for allowance purposes.

However, if you incur COE costs for a vehicle that is not ultimately acquired for business use, these costs cannot be claimed as part of capital allowances. The COE must be directly associated with a vehicle that is actively used in your business operations.

It’s advisable to meticulously track all expenses related to your business vehicles. This detailed record-keeping simplifies the process of claiming tax deductions during the tax filing season.

Renovation or refurbishment works expenditure (Section 14N)

If you’re a business owner, especially an SME, you may be able to claim tax deductions for renovation or refurbishment (R&R) work done on your business premises.

Under Section 14N of the Income Tax Act, qualifying R&R expenses are deductible as long as the work doesn’t affect the structure of the premises. This is a great way to spruce up your space and reduce business costs.

The deductible amount is capped at $300,000 for every relevant 3-year period. For sole proprietorships, this cap applies to the individual owner regardless of how many businesses they run. For partnerships, the $300,000 cap is applied at the partnership level.

Claiming section 14N deduction

So, how do you go about claiming the Section 14N deduction? It’s pretty straightforward.

First, make sure your R&R expenses qualify. General electrical installation, lighting, air-conditioning, flooring, and furniture are typically covered. Structural changes and designer fees, not so much.

When you file your income tax return, include the amount you claim under “Allowable Business Expenses” in your 4-line statement. If you’re a sole proprietor, that’s in Form B. For partnerships, use Form P.

While you don’t need to submit any supporting documents with your tax return, you should keep items like itemized lists of the R&R works, invoices, and payment records on hand. IRAS may ask you to provide these later, so hold onto them for at least 5 years.

Research & Development (R&D) expenditure

If your business does research and development (R&D) to create new products, processes, or services, you may be eligible for some tax benefits.

Who can claim R&D tax benefits?

The rule of thumb is that the taxpayer needs to benefit from the R&D activities.

What does that mean? Essentially, you need to be the one bearing the financial burden of the qualifying R&D expenditure and have ownership rights to commercially exploit the resulting intellectual property or qualifying IP.

If you’re providing R&D services to others, you likely won’t qualify for the tax benefits unless the R&D is done for your company’s gain.

Claiming R&D Tax Benefits

Now, let’s talk about how to claim these R&D tax deductions. You’ll need to include the amount under “Allowable Business Expenses” in your 4-line statement, either in Form B for sole proprietors or Form P form partnerships.

Under Section 14D of the Income Tax Act, you can claim a 100% base deduction on qualifying R&D expenses incurred. In addition, you may be eligible for a 150% enhanced deduction on staff costs and consumables for approved R&D projects. That’s a lot of potential savings.

You can also claim a 100% enhanced allowance on any capital expenditure for machinery or plant for qualifying R&D purposes.

Businesses with revenue > $500,000

If your business revenue exceeds $500,000, there are a few extra things to remember. While you can still claim enhanced deductions and allowances, they’re subject to an overall cap based on your adjusted profit for the Year of Assessment. Any excess can be claimed as base deductions.

You’ll also need to submit a breakdown of your R&D expenditure, certified statement of accounts, and tax computation. This is where detailed record-keeping comes in handy.

Key Takeaway:

Focus on claiming allowable business expenses like rent, salaries, insurance policy premiums, and R&D costs to maximize your tax deductions. Avoid personal or capital expenses that don’t directly generate revenue.