Allowable and Disallowable Expenses
Expenses are defined as a decrease in owner’s equity (Also see Liability and Shareholders’ Equity) due to the use of assets. A more layman definition will be that expenses refer to something the business spends money on. For self-employed sole proprietors that are registered with the Accounting and Corporate Regulatory Authority (ACRA), business income must be reported to the Inland Revenue Authority of Singapore (IRAS).
Knowing how to file your business tax (Also see Understanding the Singapore tax system) is essential, as it will affect the amount of tax you will have to pay at the end of the accounting period. An inaccurate accounting record that reflects a wrong amount of tax owed may then result in your record being rejected by IRAS. Part of calculating your taxes include having to record allowable and disallowable expenses, which will affect the amount of tax you have to pay.
Allowable Business Expenses
Allowable business expenses can reduce the amount of tax you have to pay as it can be claimed as a deduction against your business income. However, there are general rules set by IRAS regarding the allowable expenses that can be claimed.
- Expenses have to be related to your business operations. Documents must be provided to prove why you incurred the expenditure to earn income.
- Expenses have to be incurred. Even if you have yet to pay the money, the expense will still be considered as “incurred” when the legal liability to pay has passed.
- Expenses must be supported by proper and unabridged documents that were kept for a minimum of five years to corroborate your claims.
Examples of allowable business expenses include:
- Mandatory CPF contributions by employer (subjected to limits set by IRAS)
- Employee’s insurance
- Salary, allowance and bonus of employees
- Medical expenses (subjected to limits set by IRAS)
- Advertising fees
- Accountancy fees
Disallowable Business Expenses
Disallowable business expenses are expenses that will not reduce the amount of tax you have to pay, as it cannot be deducted against business income (Also see How to Recognize Revenue when Rights of Return are Present). Unlike allowable business expenses, disallowable business expenses may not be fully incurred to earn business income.
Hence, expenses that are for your personal purposes cannot be claimed as a tax deduction.
Examples of disallowable business expenses include:
- Your own salary, allowances, bonus and contributions to Medisave/ CPF.
- Your personal medical fees, insurance, donations and income tax.
- Repayment of loans
- Your personal income tax
- Travelling expenses for your personal trips.
- Purchase of fixed assets
Knowing what qualifies as an allowable business expense will help you to pay the right amount of tax required by IRAS. Alternatively, you can seek the assistance of some of the accounting firms in Singapore to ensure that your records are accurate.