The age-old saying, “You have to spend money to make money” is absolutely true. You can’t run a business without incurring some expenses, whether you are freelancing or selling a physical product. The good news is that it’s possible to deduct many business expenses from your taxable income and reduce the amount you pay to the Israel Tax Authority.
What is considered a business expense
Business expenses are defined as expenses that are necessary to running your business, for which you get no additional benefit and that you can provide a receipt for. (No, the Tax Authority won’t take your word for it…)
- Products – If you sell a product, the cost of purchasing the product as well as additional expenses such as shipping, storage and packaging can be deducted. Rent, price of buying and maintaining a storefront or office are also considered business expenses.
- Office – If you work from home, you can deduct your internet, and part of the water, electricity, cell phone and property taxes (arnona). Office equipment, such as computers, software, office furniture and ink for your printer can also be deducted. These apply whether your office is a rented/purchased space or a room in your house.
- Personnel – Salaries and other employee expenses like training are deductible. So are payments made to consultants, including your accountant and lawyer. Your own contributions to a pension plan, Keren Hishtalmut or Kupat Gemel grant significant tax reductions.
- Food and accommodations – Coffee, drinks and snacks can be deducted at a rate of 80%. Business trips outside of Israel only are recognized as long as they are really business trips and not a trip for pleasure onto which you tacked a conference or meeting.
- Education – Tuition for academic degrees are not deductible, but professional courses related to your business are.
- Cars – If you are an Osek Patur or Murshe and use your car to generate business, you can claim 45% of your expenses, including gas, insurance, maintenance, parking, tolls, registration fees and depreciation. If the business is registered as a corporation, a car attached to a specific person is considered an employee benefit.
- Restaurants – You cannot generally deduct the expense of taking a client or employee out to a restaurant or otherwise entertaining them. The exception is if you take a foreign client out for a meal.
- Clothes – Clothing is also not deductible, unless you need special clothing for safety or a uniform that you need to wear.
Deduct expenses carefully
When you deduct expenses, you need to be extremely careful that you are claiming only what the Tax Authority allows you to claim and that you are being honest about what you spent on your business as opposed to your personal life. Since deductions are often partial, it can be complicated to keep track of everything yourself. It is recommended to keep all receipts and hand them over to an accountant or tax advisor who will file your taxes and claim only what should be deducted.