Navigating business expenses can be challenging for self-employed individuals and partnerships. Knowing which expenses are allowable can significantly impact your tax obligations and financial health. This guide on allowable business expenses by the Inland Revenue Authority of Singapore (IRAS) helps you understand which costs you can claim as deductions against your revenue. By managing and documenting these expenses effectively, you can ensure compliance with tax regulations while maximising savings. Dive into our comprehensive guide to learn how to make the most of your allowable business expenses and keep your business finances in check with the help of an expense management software like Payboy!

What are allowable business expenses?

Allowable business expenses are costs incurred in the course of running your business that can be claimed as deductions against your business revenue, thereby reducing the amount of tax you owe. Only those that meet specific criteria set by tax regulations qualify as allowable business expenses.

What are the general rules for claiming allowable business expenses?

• Expenses must be incurred. An expense is 'incurred' when the legal liability to pay has arisen, regardless of the date of actual payment of the money. 
• Expenses must be related to your business. You must be able to show why you need to incur the expenditure to earn the income.
• Expenses that are personal and private in nature are not allowable as they do not relate to your business.
• Expenses that are capital in nature (e.g. purchase of fixed assets such as plants and machinery) are not allowable business expenses. However, the depreciation of fixed assets may be claimed as capital allowances.
• Expenses should be supported by proper and complete source documents that should be kept for at least five years to substantiate your claims.

What are some categories of allowable business expenses?

Staff Costs

• Salaries and wages: regular payments to employees, including bonuses, allowances, and statutory contributions to CPF
• Employee benefits: benefits provided to employees such as medical expenses, insurance, and employee stock options.
  • Medical expenses are deductible up to a cap of 1% of total employee remuneration, extendable to 2% if portable medical benefits are implemented​​.

Finance and professional fees

• Legal fees: Legal fees incurred in recovering trade debts, renewal of leases
• Accounting fees
• Interest on borrowing costs: Interest on money borrowed for business purposes is deductible. This includes hire purchase interest and overdraft interest​​.
• Interest on money borrowed for use in business

Running costs

• Rent and utilities: rent for business premises and utilities such as electricity, water, and telephone charges are deductible.
• Office supplies: costs of office supplies like stationery and postage are deductible​.

• Commercial vehicles: expenses incurred on commercial vehicles like vans and lorries used for business purposes, such as repairs, maintenance, and fuel, are deductible.
• Business assets: Costs for repairs and maintenance of business assets, including machinery and equipment, are deductible. However, expenditures that enhance or improve an asset are considered capital and thus non-deductible​.
• Marketing costs: Expenses for advertising and promoting the business, including digital marketing and promotional materials, are deductible​.

• Research and Development (R&D): Expenditures on qualifying R&D projects can be deducted, with enhanced deductions available under specific schemes like the Enterprise Innovation Scheme (EIS)​​.
• IP licensing: Costs incurred for licensing intellectual property for business use are also deductible under specific conditions​​.

Other allowable business expenses

• Mosque building fund, zakat, fitrah or other religious dues authorised by law
  • These should be claimed as trade expenses and not donations

Do refer to IRAS’ guide on Business expenses and deductions for the detailed list of allowable expenses!

What are some categories of disallowable business expenses?

Understanding these disallowable business expenses is essential for maintaining compliance and accurate tax reporting. Below is a summary of the key disallowable expenses:

Employee/staff costs

• Personal drawings, medical fees, income tax, insurance, and donations
• Income tax paid and any penalties or fines imposed for violating laws are non-deductible. This includes late payment fees and penalties for non-compliance with tax regulations.

Capital Expenditures

• Capital contributions or withdrawals
• Depreciation of fixed assets (to claim capital allowances)
• Entrance fees paid to professional bodies (e.g. Singapore Medical Association, Institute of Certified Public Accountants of Singapore)
• Legal fees and stamp duty on new lease agreement of an immovable property
• Purchase of fixed assets
• Renovation costs (except for qualifying expenditures, which can be claimed under Section 14N deduction).
• Start-up expenses such as licence fee, registration fee, and signboard fee.

Private expenses

• Club subscriptions and entrance fees paid for the sole-proprietor's or partner's membership
• Cost of travelling to and from your home
• Food, household and entertainment expenses for yourself, family members, and friends
• Life insurance premiums for sole-proprietor or partner
• Medical expenses incurred on the sole-proprietor or partner
• Personal income tax of sole-proprietor or partner
• Travel expenses for personal trips
• Training expenditure incurred by sole-proprietor or partner, except for non-equity salaried partner (who is considered an employee)

Private-hire cars/private car expenses

• Expenses incurred directly or in the form of reimbursement for using private hire cars or private cars (E, Q or S-plate cars), such as repair, maintenance, parking fees, and petrol costs, are disallowable. These expenses are not deductible even if the private cars were used for business purposes.

Remuneration paid to related parties (e.g. spouse and siblings)

• Remuneration is paid to the sole- proprietor's / partner's related parties, such as his parents, spouse, children, and siblings who are not working in the business.
• Excessive salary, bonus, and commission paid to the sole- proprietor's / partner's related parties that are not in line with market rate (not arm's length).
• Payments made to the related parties should be commensurate with the actual services performed by them (reasonable as compared to an independent employee with the same qualification and experience performing the same services).

Other disallowable expenses

• Fines and penalties
• Interest on loans obtained for private use
• Prayer expenses
• Repayment of loans

How do allowable business expenses reduce corporate taxes payable?

Allowable business expenses reduce corporate taxes payable by lowering the amount of taxable income a business reports. Here's how it works:

It’s therefore crucial to differentiate between allowable and non-allowable expenses. Personal expenses, capital expenses without depreciation claims, and other non-business-related costs are not deductible. Ensuring only allowable expenses are claimed prevents issues with tax authorities and potential penalties.

5 practical steps to maximise allowable deductions

To ensure compliance and maximise allowable deductions, employers should take several practical steps. These measures not only help in adhering to IRAS guidelines but also in optimising tax benefits:

Step #1: Maintain proper records

• Detailed documentation: Employers should keep detailed and accurate records of all business expenses, including invoices, receipts, payment vouchers, and other relevant documents. Because it’s crucial for substantiating expense claims during tax assessments. Maintaining organised records can help in quickly addressing any queries from tax authorities and in avoiding penalties for non-compliance.
• Retention Period: According to IRAS guidelines, duration for records and accounts keeping is five years. This retention period ensures that businesses have the necessary documents available for any audits or reviews that may occur.

Step #2: Segregate expenses

• Business vs. personal: It is important to clearly distinguish between business and personal expenses. Personal expenses are not deductible, and mixing them with business expenses can lead to complications during tax assessments.
• Capital vs. revenue expenditures: Employers should differentiate between capital expenditures (e.g., purchase of fixed assets) and revenue expenditures (e.g., operational costs). While capital expenses are not immediately deductible, they can be claimed over time through capital allowances. Understanding this distinction is vital for accurate tax reporting and the maximisation of deductions.

Step #3: Review regularly

• Periodic reviews: Regularly reviewing the company’s expenses ensures that they remain in line with IRAS guidelines. This practice helps in identifying any discrepancies or non-compliant expenses early, allowing for timely corrective actions.
• Utilise tax schemes: Periodic reviews also provide an opportunity to take advantage of any available tax schemes or incentives that may benefit the business. Staying updated with changes in tax regulations and schemes can result in significant tax savings.

Step #4: Consult professionals

• Expert advice: Engaging tax professionals or accountants can be highly beneficial. These experts have a deep understanding of IRAS guidelines and can provide valuable advice on tax planning and compliance. They can help in interpreting complex tax regulations and ensure that the business maximises allowable deductions while remaining compliant.
• Tax planning: Professionals can assist in strategic tax planning, helping businesses structure their finances in a way that optimises tax benefits. This proactive approach can lead to long-term financial advantages and smoother tax processes.

Step #5: Opt for expense management software

• Using expense or claim management software can help businesses track and categorise expenses more efficiently, ensuring that all allowable expenses are accurately recorded and claimed. This automation reduces errors and maximises the potential tax savings.

Streamline your business expense management with Payboy HR software!

Managing employees’ claims manually using spreadsheets can be a cumbersome and time-consuming task. To save time and money on managing your business expenses, implementing expense management software like Payboy’s Claims Management module can be incredibly beneficial. Here are some of the advantages of using such a system:

1. Automated expense tracking: expense reimbursement software can automatically track your business expenses, making it easy to stay on top of your spending.
2. Reduced paperwork: with an expense reimbursement system in place, you can eliminate the need for paper receipts and expense reports. This can save you time and hassle.
3. Increased efficiency: by automating expense tracking, you can free up time that would otherwise be spent on manual tasks. This can allow you to focus on more important tasks.
4. Improved accuracy: with expense reimbursement software, you can be sure that your expense reports are accurate and up to date. This can help you avoid errors and discrepancies.
5. Greater control: an expense reimbursement system can give you greater visibility into your business expenses, allowing you to more effectively manage and control your spending.

Streamline your HR processes with Payboy today!

As a PSG-approved HRMS, Payboy provides a robust system to help you manage your HR tasks so that you can focus on your business and people!

With our wide range of modules, you can customise a solution to meet the specific needs of your business:

Payroll Processing | Leave Management | Claims Management | Applicant Tracking

Time Attendance | Shift Scheduling | Appraisal System | Inventory Management

Project Costing | Training Management