Which expenses are actually deductible

Guide · 8 minute read

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

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.

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

1. Match every claimed expense to a document, in the business name.
2. Separate the running costs from the assets, and check the depreciation on the assets.
3. 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.
4. Check the ones that changed this year. There are always a few.

Depreciation without the theory

An asset is claimed across the years it serves you, at a rate set per asset type. Computers depreciate fast, furniture slowly, and the regulations carry the specific rates. Small items below a modest shekel threshold are written off in the year of purchase instead, which is why a keyboard is an expense and a workstation is an asset.

Two practical points. The clock starts when the asset is put into use, not when it was ordered or paid for. And the VAT behaves differently from the income tax: input VAT on a qualifying asset comes back in full in the period you bought it, while the cost itself is spread over years. Buying equipment in December therefore has an immediate VAT effect and a small income tax effect, which is worth knowing before anyone recommends a year-end spending spree.

Expenses from before you registered

Costs incurred while setting up, before the file was open, are not automatically lost. Equipment bought shortly before registration can generally be brought into the business, and the input VAT may be recoverable within a limited window. The requirement is documentation in a usable form: an invoice with your name on it and a defensible date. Keep those receipts even in the months when there is no business yet, because reconstructing them later is not possible.

The mixed card problem

One card for business and personal spending is the single biggest source of bookkeeping work in a small business. It is legal and it costs you in three ways: every statement needs a line-by-line decision, private items claimed by accident are the easiest thing for an auditor to find, and genuine business expenses get missed in the noise.

A separate card is not a legal requirement and it removes most of the problem for the price of ten minutes at the bank. Where a single expense really is mixed, a phone line or the home internet, the split is a percentage applied deliberately, not a judgement made monthly on a statement.

What is never deductible

• Fines and penalties. Parking tickets, late-filing fines, interest on tax debt. The state does not subsidize its own penalties.
• Your own drawings. A self-employed person does not pay themselves a deductible salary. What you take out is profit that was already taxed.
• Private spending routed through the business. Groceries, family travel, a home appliance. Whose card paid does not change the character.
• The income tax itself. Note the contrast with National Insurance, part of which is deductible.
• Clothing you could wear anywhere. A suit for client meetings is the classic rejected claim.

Pension and study-fund contributions are the frequent point of confusion here. They are not business expenses, and they still reduce your tax, through personal deductions and credits on the annual return. The money is worth claiming, in the right box.

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.