Which expenses are actually deductible
Business expense is not one question, it is three, and they have different answers. Does this count as a business expense at all. What percentage of it is recognized against income tax. Does the VAT on it come back. A lunch can be a genuine business cost, recognized at zero percent, with no VAT deduction. Keeping the three apart is most of the skill.
The three tests
Was it in the production of income. The expense has to serve the business, in the year you are claiming it. Private spending stays private no matter whose card paid for it.
Is it running cost or capital. Something consumed this year is an expense. Something that serves you for years is an asset, and it is claimed through depreciation instead. A laptop is the everyday case.
Is there a document. Input VAT needs a valid tax invoice made out to the business. A receipt is not enough, a card statement is not enough. This is where most denied claims actually die, not in the arithmetic.
The common categories
| Expense | Income tax | Input VAT |
|---|---|---|
| Private car running costs | 45% | Blocked |
| Mobile phone | Usually 80%, with a floor that is never recognized | By business share |
| Home internet, electricity, rent | By business share of the home | By business share |
| Hosting and meals inside Israel | Not recognized | No |
| Hosting a visitor from abroad | Recognized, reasonable amounts | Yes |
| Work clothing | 80%, or in full if unusable outside work | Yes |
| Refresher courses, professional literature | Yes | Yes |
| Degree or qualification course | No, treated as capital | No |
| Gifts to clients | Capped per recipient per year | Limited |
| National Insurance payments | 52% of what you paid | Not applicable |
| Equipment above the small-item threshold | Depreciation over its life | Yes, in full at purchase |
Percentages and shekel figures in that table are set in regulations that get updated, some of them annually. Treat it as the shape of the rules, not as this year's numbers.
The car, in more detail
Running a private car for the business gives you 45 percent of the costs against income tax. Fuel, insurance, licensing, repairs, parking, and lease payments all go into the same pot before the percentage is applied. There is an alternative calculation based on the value-of-use figure, and the rules let you take the better of the two, which is a conversation to have with your accountant rather than a decision to guess at.
The VAT side is harsher. Input VAT on a private passenger car is blocked outright, purchase and running costs alike. Commercial vehicles above a weight threshold are the exception, and the exception is what makes a small van a genuinely different financial object from a hatchback.
Phone, internet, and the room you work in
These are mixed by nature, and the law deals with mixed use by fixing a fraction rather than trusting anyone's estimate. A mobile line is generally recognized at 80 percent, with a floor amount each year that is never recognized at all.
A home office is proportional. Work out the share of the home the business genuinely uses, and apply it to rent, electricity, water and municipal tax. If the room does nothing else, the share is defensible. If it is the corner of the living room, keep the claim modest, because this is a line that gets looked at.
For VAT on mixed expenses there is a separate mechanic: an expense used mainly for the business lets you claim two thirds of the VAT, and one used mainly privately lets you claim a quarter. It is a blunt instrument on purpose, and it applies whatever your income tax percentage turned out to be.
Meals, hosting and the mistake everyone makes
Your own lunch while working is not deductible, no matter how far from home you were. Hosting Israeli clients in a restaurant is not deductible either, which surprises people every year. Hosting a business visitor from abroad is recognized, at reasonable amounts. Light refreshments at your own place of business are a small separate allowance.
The pattern is that the law does not want to subsidize eating, and it accepts that entertaining foreign clients is a real cost of doing business abroad. Everything in between is disallowed on purpose.
Where the percentage actually lives
This is the part software gets wrong. Reading a receipt and deciding it is a phone bill is a text problem, and a model does it well. Knowing that a phone bill is 80 percent is not a text problem. It is legislation that changed at some point and will change again, and it belongs in a table someone maintains, looked up after the category is chosen.
Any tool that produces both the category and the percentage from the same model is guessing at the second one, confidently. The expense categorizer here is built the other way round, and the receipt errors guide covers the rest of that failure mode.
Before the annual return
- Match every claimed expense to a document, in the business name.
- Separate the running costs from the assets, and check the depreciation on the assets.
- Apply the percentages once, at the end. Claiming 100 percent all year and fixing it in one adjustment is normal and is cleaner than half-remembering the fraction on every line.
- Check the ones that changed this year. There are always a few.
General information, not tax advice for your situation. Percentages, ceilings and thresholds are updated regularly, so confirm current figures with the Tax Authority or your accountant before filing. Next: Israeli VAT without the jargon, or exempt or licensed dealer.