What Business Expenses are deductible for Corporate Tax filing?

As the tax deadline approaches, a fundamental question for tax preparers: Which business expenses are deductible?

The Inland Authority of Singapore (“IRAS”) provides a comprehensive list of expenses offering guidance on the deductibility of key expenses. However, the classification of certain expenses may be more complex and do have to meet specific criteria. It is thus possible for a certain class of expense to have a deductible and a non-deductible portion.

In this article, let’s explore 6 common business expenses where SMEs tend to be uncertain about in terms of its deductibility status during tax filing.

1.      Private Expense/Personal Expense/Private car expense

This is a common category of expense where SME owners tend to have confusion. Small setups such as family-managed SMEs are more likely to have weaker accounting records and have a higher tendency to make incorrection deduction claims.

Only expenses incurred in the course of business activities are to be considered for deductions during the preparation of a tax computation. Expenses that pertain to personal items, travelling or vacation expenses are non-deductible expenses. SMEs should also pay special attention when they come across private car related expenses. Private car expenses such as repairs, maintenance, fuel are not deductible even if it is solely for business expenses.

There might be other instances of private expenses not listed above which may appear in the accounting records of any businesses. Considering that small businesses face difficulties in segregating between business and private expenditures (usually due to the lack of resources), SME owners should consider to perform additional review or seek professional assistance to ensure tax compliance.

2.      Capital expenditure (CAPEX) vs. Operating expenses

Another common mistake will be classifying capital expenditure as a business expense. Usually, capital expenditure pertains to the purchase of business assets which are usually define as expenditure on assets that provides value or benefit in the long term. Examples will be computers, equipment, machineries, infrastructures. Such CAPEX items should not be classified as an expense. Businesses may claim capital allowances on these items instead over a period of time in. For ease of understanding, think of capital allowances as a form of “tax depreciation”.

Example of Capital Expenditure: Office Equipment, Plant and Machinery, Electrical Equipment, Motor vehicles (Except S-plated vehicle), Furniture and fittings

Example of Operating Expenses: Marketing expense, professional fees, Inventory, Utilities and rental

3.      Depreciation: Not a Deductible Expense

In tax accounting, depreciation is not a deductible expense. Instead, if an asset is qualifying, capital allowance for the wear and tear of the assets can be claimed over a period of time. This is subjected to certain conditions and these can be seen in IRAS website. As mentioned earlier, capital allowances act as the tax equivalent of depreciation, suggesting that accounting depreciation is not deductible.  Do note that the differences between the carrying amount and the tax base will give rise to a potential taxable temporary difference.

4.      Foreign Exchange Gains and Losses: Tax Implications

For business dealing with foreign currencies, a line item known as foreign exchange gain/loss may appear in your accounting records. The nature of the item that give rise to this foreign exchange gain or loss is critical as it will determine if the gains are taxable or if the losses are deductible. The following matrix should explain:

Capital and Revenue items are defined by a certain set of characteristics. In a very simplified manner, one can understand that capital items are usually non-recurring, infrequent transactions involving long term assets or investments. Revenue items on the underhand is part of the day-to-day operations and income generation of the business.

Examples of Capital transactions include purchasing of a machinery, acquiring a piece of land and investing in a subsidiary while revenue transactions include the purchase of goods, utilities expenses, advertising expenses.

In practice, a small business usually consolidates all foreign exchange gain or loss into a single account. For tax purposes, it will be necessary to split them according to its fundamental nature to distinguish between Capital and Revenue items. As part of a tax query, it is common for the authorities to request for a general/detail breakdown (similar to the table above) to indicate the gain/loss under each situation.

5.      Interest Expense: Deductible or not?

Classification of interest expense has always been a big problem for SMEs and large corporations alike. Interest pertaining to trade-related loans such as trade financing/factoring are straightforward and can be easily classified as a deductible expense. Likewise, if a loan is taken solely to acquire a subsidiary, it will be considered as a non-deductible expense. However, in practice, most businesses take up a general loan from bank and are used to fund multiple areas. In complex situations, there might be multiple loan sources (at different interest rates) for multiple usages (Different mix between Capital and Revenue items) at different tenure (Different daily balances). The following is a simplified example to suggest the potential complexity in relation to the classification of interest expense. In esssence, the challenge is always being able to clearly identify the specific purpose of each loan amount.

Assuming the figures do not fluctuate on a daily basis, we can notice that interest computed on loan amount of 4.3 (Jan), 2.5 (Feb), 3.5 (Mar) and 4.5 (Apr) are trade-related interest expense and will be allowed deductions. Assuming the total 8.9 for Jan, Feb and March comprises of two distinct loans at different interest rates, it will then become a challenging tasks to allocate the interest expenses. (5 at 4.25% per annum while 3.9 at 3.8% per annum)

(For the purpose of this article, we will not deep dived into the solution or appropriate treatment. The key takeaway for this example is to allow readers to appreciate the existence of difficulties in this situation.)

6.      Penalties and Fines: Not Deductible

In general, penalties and fines, including interests for late or non-compliance payments are non-deductible expenses. This is regardless of whether the penalties or fines are incurred during/for the course of business. For companies that hire drivers or require certain form of logistic transportation, internal policies may indicate that the employers will be responsible for payment of certain parking fines or penalties. This item is however, a non-deductible expense and when companies are preparing their tax computation, they should adjust this line item accordingly.

Conclusion

Determining the deductibility of business expenses can be challenging, especially in complex scenarios. SMEs must pay close attention to the tax treatment of each type of expense, as errors in classification can result in significant tax liabilities. IRAS recently reported that in 2022, 44% of family-owned businesses had errors in their tax returns, resulting in S$3 million in imposed penalties. This underscores the importance of accurate corporate tax filings.

If you are uncertain about the deductibility of certain expenses or need help with your tax matters, it’s always a good idea to consult with a tax professional.

For companies who had filed their tax returns, it is advisable to review them should there be any doubts. Under IRAS’ Voluntary Disclosure Programme, businesses can still disclose any omissions or errors within a one-year grace period from the statutory filing date of 30 November. Voluntary disclosures made outside this period will incur a reduced penalty rate.

At Oaktree Accounting and Corporate Solutions, we provide comprehensive tax services ranging from Corporate Income Tax (CIT), Goods & Service Tax (GST), Withholding Tax (WHT), Transfer Pricing (TP) and Tax advisory services. We also assist clients in managing IRAS inquiries and ensuring tax compliance. If you have any tax-related questions, feel free to contact us for an obligation-free consultation.

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DISCLAIMER: The views and opinions expressed in this article are those of the author and do not necessarily represent the views and opinions of any individuals or organizations with which the author may be affiliated, either in a professional or personal capacity, unless explicitly stated.

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