Business Expenses

Before preparing the statement of accounts for your business, you need to know what are the allowable and disallowable business expenses for tax purposes. 

Allowable Business Expenses

Allowable business expenses are expenses that you can claim as deduction against your business income to arrive at your adjusted profit.

General rule for claiming expenses

You can generally claim a deduction against your business income for expenses that you incur wholly and exclusively to earn your business income.

There are some basic rules:

• The expense must be related to your business - you must be able to show why you needed to spend the money to earn the income.
• Expenses that are capital in nature cannot be claimed.
• Expenses that are personal and private in nature cannot be claimed.
• Proper and complete records and source documents should be kept for at least 5 years to substantiate your purchases and expenses.

For more information, you may wish to refer to the Starter Guide for the Self-Employed  (194KB) 

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Disallowable Business Expenses

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Productivity and Innovation Credit (PIC) ^Revised!

The PIC is available for five Years of Assessment (YA) from YA 2011 to YA 2015. From YA 2011, businesses can claim 400% tax deduction on up to $400,000 spending per annum on any of the following 6 qualifying activities:

1.Acquisition or Leasing of PIC Information Technology (IT) and Automation Equipment

2.Training of Employees 

3.Acquisition of Intellectual Property 

4.Registration of Intellectual Property

5.Research and Development

6.Design projects approved by Design Singapore Council

In addition, you can choose to combine your spending across YAs for each activity to enjoy the maximum benefits from PIC.

For YA 2011 and 2012, a combined spending cap of $800,000 applies for each qualifying activity. This means a combined tax deduction of up to $3.2m (400% x $800,000) for each activity.

For YA 2013 to YA 2015, a combined spending cap of $1,200,000 applies for each qualifying activity. This means a combined tax deduction of up to $4.8m (400% x $1,200,000) for each activity

Example

Your business purchased qualifying automation equipment¹ for $300,000 in YA 2011. The amount of capital allowance (CA) that will be given to your business is as follows:

Base allowance (normal CA at 100%) : $300,000 x 100% = $300,000

Enhanced allowance (300%) : $300,000 x 300% = $900,000

Total capital allowance for YA 2011 : $300,000 + $900,000 = $1,200,000 

Your business incurred another $600,000 on automation equipment in YA 2012. The amount of capital allowance claim will be calculated as follows:

Base allowance (normal CA at 100%) : $600,000 x 100% = $600,000

Enhanced allowance (300%) : $500,000² x 300% = $1,500,000

Total capital allowance for YA 2012: $600,000 + $1,500,000 = $2,100,000

For more examples on the types of IT and automation equipment that qualifies for PIC, you can refer to PIC Information Technology (IT) and Automation Equipment List (223KB) and the Examples of IT and Automation Equipment Qualifying for PIC (By industry). 

¹ If the IT or specialised equipment that your business has invested in is not the PIC Information Technology (IT) and Automation Equipment List (223KB) but it serves to automate your business processes and enhance productivity, you may apply to IRAS to have the equipment approved for PIC claims. We will consider such applications on a case-by-case basis.

² The combined cap for each activity in YA 2011 and 2012 is $800,000. As $300,000 of the expenditure is for the enhanced allowance in YA 2011, only $500,000 of the expenditure will be claimable under enhanced allowance in YA 2012.

PIC Bonus ^NEW!  

As announced in the Budget Statement 2013, for YAs 2013 to 2015, businesses that invest in qualifying activities under the PIC scheme will receive a PIC Bonus. The PIC Bonus gives businesses a dollar-for-dollar matching cash  bonus for YAs 2013 to 2015, subject to an overall cap of $15,000 for all 3 YAs combined. This is given on top of the existing 400% tax deduction/allowances or 60% cash payout (“PIC cash payout”) under the PIC scheme. To enjoy the PIC Bonus, businesses must have made a claim for the 400% tax deductions/allowances and/or the PIC cash payout. The PIC Bonus is taxable.

For more details, please refer to PIC bonus.

Cash Payout Option

Businesses have a choice to convert their qualifying expenditure in the six qualifying activities into a non-taxable cash payout in place of the tax deduction/allowances. This PIC cash payout option is available from YA 2011 to YA 2015 at a conversion rate of 30% for YA2011 and YA 2012 and 60% for YA 2013 to YA 2015.

For YA 2011 and YA 2012, businesses can opt to convert up to a combined cap of $200,000 qualifying expenditure for all the six qualifying activities, into cash payout. The total cash payout for YA 2011 and YA 2012 is therfore a maximum of $60,000 ($200,000 x 30%).

For YA 2013 to YA 2015, businesses can receive a cash payout of up to $60,000 ($100,000 x 60%) each year with the higher conversion rate of 60%.

Tax Deferral Option

Businesses may also elect to defer paying their tax for the current YA if PIC qualifying expenditure has been incurred in the current accounting year. The amount to be deferred is a dollar of current YA tax for every dollar of PIC qualifying expenditure incurred for the current accounting year. This election is available for tax payable for YA2011 to YA2014 based on qualifying PIC expenditure incurred in the corresponding accounting years 2011 to 2014. The amount of tax that can be deferred is capped at $100,000 and is the lower of tax payable assessed for the current YA and the qualifying expenditure incurred in the accounting year.

Example:

Individual A's sole-proprietorship business accounting year ends on 31 December 2011. The business purchased computers on 1st Feb 2011 for $80,000 that qualifies for PIC in YA2012. He also has tax payable of $200,000 for YA2011 wich remains unpaid as at Feb 2011.

He can elect to defer $80,000 of his tax payable for YA2011, which is up to the amount of qualifying PIC expenditure incurred in the business accounting year 2011.

Common Mistakes to Avoid for PIC Claims

To make a qualifying and correct claim, please refer to Common mistakes to avoid for PIC claim.

How to claim PIC

• PIC Enhanced Allowances / Deduction

The amount of qualifying PIC enhanced allowances/deductions to be claimed should be included under the “Allowable Business Expenses” of the 4-line statement in Form B (self-employed) or Form P (partnership).

The prescribed form, PIC Enhanced Allowances/Deductions Declaration Form for Sole-proprietors & Partnerships (99KB), should be submitted together with the Income Tax Return (Form B or Form P) by the filing due date.

For sole-proprietors claiming PIC enhanced allowances/deductions for more than 1 business, please submit separate declaration form for each business.

• PIC Cash Payout

For details on the application of PIC cash payout and a copy of the application form, please refer to Application for Cash Payout.

• Tax Deferral Option

To apply for tax deferral, submit a PIC Tax Deferral Form (52KB) to IRAS anytime (but not later than the end of your business' accounting year) after a qualifying PIC expenditure is incurred during the accounting year. IRAS will process the election within 30 days of the receipt of the Form.

For more details of the PIC scheme, please refer to Productivity and Innovation Credit and the e-Tax Guide Productivity and Innovation Credit (739KB). 

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Medical Expenses

With effect from YA 2008, in recognising that employers’ provision of portable medical shield plans or ad-hoc contributions to the Medisave accounts of employees achieves the same objective as the PMBS and TMIS, you may claim a tax deduction up to 2% of the total employees' remuneration if your business:

1. has provided your employees with inpatient medical insurance benefits in the form of portable medical shield plans (excluding premiums for riders that cover deductibles and co-payments); or

2. has made ad-hoc contributions to your employees’ Medisave Accounts (subject to a cap of $1,500 per employee per year regardless of the number of employers the employee has) during the relevant basis period.

Tax deduction will remain capped at 1% of total remuneration if your business is not on PMBS or TMIS or do not provide portable medical shield plans or make ad-hoc medisave contributions for your employees.

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Capital Expenses Incurred on Renovation or Refurbishment Works Done to Your Business Premises

Currently, capital expenses incurred on renovation or refurbishment works (R&R costs) carried out on the business premises is not allowable as a tax deduction, unless the R&R costs constitute expenses on repairs or replacements with no element of improvement.

Such R&R costs also do not qualify as capital allowances unless they form part of an industrial building which qualifies for industrial building allowances. This is because they are incurred in relation to the business setting within which the business is carried on and not on the provision of  “plant or machinery”.

Section 14Q Deduction for Expenses Incurred on Renovation or Refurbishment works (R&R Costs)

To help businesses, particularly small and medium enterprises, reduce their business costs, tax deduction will be granted on all qualifying R&R costs incurred between the period 16 Feb 2008 to 15 Feb 2013 under Section 14Q of the Income Tax Act.

Under Section 14Q, the amount of R&R costs that will qualify for tax deduction is subject to an expenditure cap of $150,000 for each taxpayer over every relevant three-year period. The three-year period starts from the year in which the R&R costs were incurred and a deduction is claimed by the taxpayer. The amount of qualifying R&R costs incurred will be allowed as a deduction equally in 3 consecutive YAs.

For partnerships, the expenditure cap of $150,000 will be applied at the partnership level. Tax deduction will be allowed up to a cap of $150,000 over the three-year period.

Example

Your business incurs qualifying R&R costs of $200,000 on 1 Mar 2009 (basis period is 1 Jan 2009 to 31 Dec 2009) but business ceases on 31 Dec 2010.

You will be given a tax deduction of $50,000 ($150,000 / 3 years) against your income for each of the YAs 2010 and 2011. As there is no income derived from the business from 1 Jan 2011 (basis period for the YA 2012), the balance $50,000 will not be allowed to you for YA 2012.

Qualifying expenditure

The following items will generally qualify for Section 14Q deduction if they do not affect the structure of the business premises:

(a) General electrical installation and wiring to supply electricity;
(b) General lighting;
(c) Hot/cold water system (pipes, water tanks etc);
(d) Gas system;
(e) Kitchen fittings (sinks, pipes etc);
(f)  Sanitary fittings (toilet bowls, urinals, plumbing, toilet cubicles, vanity tops, wash basins etc.);
(g) Doors, gates and roller shutters (manual or automated);
(h) Fixed partitions (glass or otherwise);
(i)  Wall coverings (such as paint, wall-paper etc.);
(j)  Floorings (marble, tiles, laminated wood, parquet etc.);
(k) False ceilings and cornices;
(l)  Ornamental features or decorations that are not fine art (mirrors, drawings, pictures, decorative columns etc.);
(m)Canopies or awnings (retractable or non-retractable);
(n) Windows (including the grilles etc.);
(o) Fitting rooms in retail outlets.

No deduction will be allowed on expenditure relating to:

(a) Any designer fees or professional fees;
(b) Any antique; or
(c) Any type of fine art including painting, drawing, print, calligraphy, mosaic, sculpture, pottery or art installation.

How to claim the Section 14Q deduction?

The amount of qualifying R&R costs to be claimed should be included under the “Allowable Business Expenses” of the 4-line statement in Form B (self-employed) or Form P (partnership).

To claim the Section 14Q deduction on the qualifying expenditure, please submit an itemised list of the renovation or refurbishment works using the R&R form. 

If you have incurred these expenses for more than one business, please submit the prescribed form for each business.

Please confirm on  the prescribed form that the renovation or refurbishment works do not require the approval of the Commissioner of Building Control (which means the renovation and refurbishment works do not involve structural changes).

If you file your tax return electronically, the completed prescribed form has to be sent to IRAS immediately after you have e-filed.

For business with revenue of $500,000 or more, the completed prescribed form is to be submitted together with the certified statement of accounts and tax computation.

Enhancement of the Deduction for Expenditure incurred on Renovation or Refurbishment Works for YA 2010 and YA 2011

As announced in the Budget 2009 Statement, taxpayers who incurred qualifying R&R costs in the basis periods for YAs 2010 and 2011 will have the option of claiming the tax deduction in one year instead of three years. The other conditions for the deduction under S14Q remain unchanged.

Example

Your business' qualifying R&R costs: $60,000 on 5 June 2008, $80,000 on 1 Mar 2009 and $20,000 on 3 Feb 2010

Your tax deduction will be as follows:

* 20,000 = 60,000/3
** As the expenditure cap of $150,000 has been reached for the relevant 3-year period, no deduction will be allowed in respect of the remaining $10,000 incurred on 3 Feb 2010.

Enhancement of the Deduction for Expenditure incurred on Renovation or Refurbishment Works with effect from YA 2013^New! 

As announced in Budget 2012, the following enhancements to the R&R  scheme will take effect from YA 2013:

(a)  The tax deduction will continue to be granted on all qualifying R&R costs incurred after 15 Feb 2013; 

(b)  The expenditure cap of $150,000 will be doubled to $300,000 for each taxpayer for every relevant three-year period. 

The increased expenditure cap of $300,000 will be applicable in YA 2013 even if YA 2013 is not the first YA of the relevant three-year  period for claiming R&R costs, i.e. YA 2013 is the second or third YA of the relevant three-year period for R&R claim.

The table below shows how the revised expenditure cap will apply to taxpayers under various scenarios with effect from YA 2013:

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For details of the section 14Q deduction, please refer to the e-Tax Guide "Tax Deduction For Expenses Incurred on Renovation or Refurbishment Works Done to Your Business Premises" (97KB).

Research & Development Expenditure

If your business is:

• carrying on a trade in manufacturing; or
• carrying on a business for the provision of any services;

you can claim deductions for research & development (R&D) expenditure related to that trade or business:

• incurred by your business; or
• incurred on R&D activities outsourced to any R&D organisations

In addition, your business may enjoy double tax deduction on the R&D expenditure incurred if it is approved by Economic Development Board (EDB).

Enhancement of R&D Tax Deductions from YA 2009 to YA 2013

With effect from Year of Assessment 2009, the tax deductions of R&D expenditure is no longer restricted to manufacturing business or business for the provision of services. The changes in tax deductions for R&D expenses are as follows:

1.Removal of the requirement that R&D expenses incurred must be related to the existing trade or business.

Your business can qualify for tax deduction on expenditure incurred on qualifying R&D activities conducted in Singapore which is unrelated to your existing trade or business.

2. Enhanced deduction for R&D expenses under Section 14DA in respect of R&D done in Singapore.

The tax deduction has been raised from 100% to 150% of the actual R&D expenditure incurred on R&D done in Singapore.

Qualifying R&D Expenditure

The following types of expenditure incurred in connection with qualifying R&D activities carried out in Singapore are eligible for further tax deduction equal to 50% of the expenditure under Section 14DA:

(a) Staff costs (excluding directors’ fees);
(b) Consumables

For more details, please refer to Annex A, B & E of the e-Tax Guide "Research And Development Tax Measures".

How to claim the R&D deduction?

The amount of qualifying R&D expenditure claimed is to be included under the “Allowable Business Expenses” of the 4-line statement in the Form B (self-employed) or Form P (partnership).

You are also required to submit a completed prescribed R&D claim form together with the breakdown showing the items of qualifying R&D expenditure incurred during the basis period. 

If you file your tax return electronically, the completed prescribed form and the breakdown of the qualifying R&D expenditure have to be sent to IRAS immediately after you have e-filed.

For business with revenue of $500,000 or more, the completed prescribed form and the breakdown of the R&D expenditure are to be submitted together with the certified statement of accounts and tax computation.
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Expenses Incurred Before Commencement of Business

Generally, expenses incurred prior to the date on which a business commences operation are not tax deductible as they are not wholly and exclusively incurred in the production of income.

From YA 2004 to YA 2011

Under the concession for enterprise development, a business will be treated as having commenced operation on the first day of the accounting year in which it earns its first dollar of business receipt (i.e. deemed date of commencement of business). With this concession in place, you may claim allowable business expenses that you incur from the first day of the accounting year even though your business commenced later during the year.

Read the e-Tax Guide "Concession for Enterprise Development - Tax Deductions Allowable for Certain Expenses Incurred Prior to Commencement of Business" for details of the treatment from YA 2004 to YA 2011.

From YA 2012 onwards ^New!

As announced in Budget 2011, the concession for enterprise development has been further enhanced to allow a deduction for revenue expenses incurred 1 year prior to the deemed date of commencement of business. 

Example

Your business was set up on 1 Dec 2009 and its accounting year ends on 31 Dec. Revenue expenses such as rental, utilities, etc was first incurred on 1 Dec 2009. The first dollar of business receipt was earned on 1 Feb 2011.

The table below shows the tax concessions for expenses incurred prior to commencement of business before and after the enhancement:

For full details on the enhancement of the concession for enterprise development, please refer to the e-tax Guide "Concession for Enterprise Development - Deduction of Certain Expenses Incurred before Business revenue is Earned".

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