A small business can be categorized as Osek Murshe (a VAT-paying business) or Osek Patur (VAT-exempt business). Until recently, owners of both of these types of businesses had to keep track of expenses and have them deducted from their revenue in order to calculate taxes accurately. An Osek Morshe can request a refund from the VAT authorities for the VAT they paid on expenses. Usually this is deducted from the VAT they collected and reduces the amount they pay to the government.
Beginning in 2025, a new definition for Mas Hachanasa (Income Tax Authority) has been added, that of Osek Zair (literally meaning small business).
Advantages of being classified as Osek Zair
The goal of the new classification is to streamline processes for small businesses, so reporting has been simplified:
- An automatic deduction of 30% for expenses replaces the need to document and report actual expenses
- It should be easier to file without an accountant needed
- Owners of an Osek Zair who choose the abbreviated reporting option (as opposed to the regular one) will be exempt from filing a Hatzharat Hon (declaration of assets).
Who is eligible
In order to be eligible for Osek Zair status, a business must fulfill these requirements:
- Have an annual income of 120,000 NIS or less
- Not have any employees
- No one client pays more than 50% of the business’ revenue
Who benefits most
A small business owner with expenses lower than 30% of revenue will benefit most from this new status. The 30% deduction, coupled with the savings on accounting costs, will help this type of business grow and alleviate the need to spend time and energy on tedious paperwork.
There are some exceptions to this rule, such as when a business owner wants to deduct large amounts of charitable donations or when the owner’s spouse runs a larger business.
Note that an Osek Murshe can also be classified as an Osek Zair. If a business is classified as Murshe because their annual income used to be higher or because they are in a profession that wasn’t allowed to be classified as Osek Patur, they can also consider switching over to Zair.
The decision to become an Osek Zair (or not) is best taken on the advice of an accountant or tax advisor. US citizens should consult with an accountant who also understands US tax law, since any type of self-employment comes with American tax implications.