Mazel tov on setting up your new business! If you’re just starting out, chances are that you will be an “Osek Patur,” a business which is exempt from collecting and paying VAT. The following is a brief overview of what you need to know for your new Osek Patur.
- Mas Hachnasa- Your tik (file) in Mas Hachnasa (Israeli Tax Authority) is registered on both your name and your spouse’s name.
Every year a Doch Shnati (annual report – tax return) is submitted which should include all income earned both in Israel and abroad for both spouses. If you work with an accountant or tax consultant (and we recommend that you do), send your receipt book, expense invoices and any other documents you have to your accountant in January of the next year for preparation of the Doch Shnati. - Bituach Leumi (National Insurance) – If, according to the definitions of Bituach Leumi you are required to make payments to National Insurance, you have the choice to pay via credit card or a monthly set payment (horaat keva). You should set this up as quickly as possible so you don’t end up with back payments.
- Ma’am (VAT) – Your file at the VAT office is only under your name and doesn’t include your spouse. The updated ceiling for your income in 2021 is 99,893 NIS per year. Please check your income during the year making sure you are not approaching the ceiling, and if you are please update the VAT office as soon as possible.
- Revenue recognition (receiving payment from a client) – Israeli accounting requirements dictate that an official receipt (kabala) must be issued immediately upon receipt of payment from a client, or as soon as you become aware of a cash receipt (in the case of a bank transfer). It is important that this practice is strictly enforced. Non-issuance or late issuance of invoices may cause accounting complications and headaches, even possibly fines.
Receipts can be issued in two ways:
- Use of online programs or applications – many of which are easy to use and are readily available, including: Easy Count, Cheshbonit Yeroka, Cheshbonit Online, iCount and more. (Some are free and some come with a low monthly fee.)
- Manual receipt book – this book can be purchased and printed in a printshop. Ask them for a receipt book for an Osek Patur – Original + two copies per receipt.
The invoice must include the following details on the top:
Full name/Business name, Address, Phone number of the business and osek patur number (which is generally your teudat zehut number).
The receipt should provide information about the service provided and the method of payment (cash, bank transfer, check – including check number). If payment was in another currency, include the rate of exchange to shekels.
- Important highlights when filling out a receipt:
- Receipts should be issued at the time of the receipt of payment, even if the service will be provided at a future date.
- The dates and numbers of each receipt must be consecutive. Do not issue receipts out of order!
- The original should be given to the client, and copies should remain with you (the business).
- When a receipt has to be cancelled, or a numbered receipt was skipped, the cancelled/skipped receipt should stay in the book and you should write “cancelled” or “skipped” on it.
- Receipts in the amount of more than 5,000 NIS should include the client’s teudat zehut or business number in addition to their full name.
- In cases of receipts over NIS 11,000, per law, cash cannot be exclusively used – payment must be remitted via check or bank transfer.
- Saving expense documents/paperwork:
It is strongly advised to keep as many expense documents as possible. Any expense that you submit will save you from higher income tax and Bituach Leumi payments.
It is also advised to keep donation receipts in order to reduce tax payments (or receive a tax payment refund), if you have any. Please note that receipts must be from Chapter 46 recognized organizations,and their status must be noted on the receipt. This applies even in years that one did not make any tax payments, as donation receipts may be used for 4 years.
The following are considered direct business expenses, and are 100% recognized and deductible:
- Furniture and equipment for business, office equipment
- Travel by taxi and public transportation
- Advertising, marketing, education, advanced training
- Accounting, professional advice/consulting
- Subcontractors (external consultants, professional temp positions)
- Credit card fees
Indirect/mixed expenses, partially recognized:
- Private car expenses (including insurance, license, fuel, maintenance/repair) – 45%
- Cell phone – 50%
Home expenses- 25%:
- Landline, internet
- Electricity, water
- Municipal taxes (Arnona) and Homeowner Association Fees (Va’ad Bayit)
- Renovations
- Inventory
One is obligated to count all inventory in one’s possession on December 31st of every year, in the event that one has raw materials or equipment or other items for sale that require evaluation.
- Hatzarat Hon (Financial statement):
Sometime after the opening of your independent contractor tax file, Mas Hachnasa will request and require a Hatzarat Hon (financial statement) as of December 31st of the year that the tax file was opened. The statement details all the assets and liabilities of the business owner as of the date of the statement. Additional Hatzarat Hon requests are generally made once every 4-5 years.
It is generally recommended to submit this statement with the help of an accountant or tax consultant, since it can be complex. The first one should certainly be submitted with professional assistance, since it serves as the basis for all future statements.