Tax Treatment of Business Expenses (A - H)

Deductibility of specific expenses such as donations, employment assistance payments, medical expenses, motor vehicle expenses, R&D expenditure and voluntary cash contributions to Medisave Account.

Borrowing costs as a substitute for interest expense or to reduce interest costs

Generally, interest expenses incurred on loans or borrowings taken to finance income-producing assets are tax-deductible against the income earned.

Borrowing costs are costs other than interest expenses that are incurred to secure lower interest rates on loans or borrowings to finance capital expenditure that produce taxable income. Examples of borrowing costs include guarantee fees, bank option fees, prepayment fees / early redemption fees etc.

To align the tax treatment of borrowing costs with interest expenses, a list of tax deductible borrowing costs are prescribed in the Income Tax regulations. To qualify for tax deduction, the borrowing costs must be incurred as a substitute for interest expense or to reduce interest costs.

For more information on such borrowing costs, please refer to IRAS’ e-tax guide ‘Income Tax: Tax Deduction for Borrowing Costs Other than Interest Expenses’.

Dividend payments made on preference shares

Under Financial Reporting Standard 32 issued by the Institute of Chartered Accountants (ISCA), preference shares issued shall be recorded as financial liabilities in the issuer's financial statements, where the issuer does not have an unconditional right to avoid delivering cash to settle contractual obligation. Examples of such preference shares include those issued with a mandatory redemption date or with an option of redemption exercisable by the shareholders.


For tax purposes, the characterisation of preference shares as a debt or equity instrument is first and foremost determined based on its legal form, and not its accounting treatment. However, should the legal form be non-indicative or does not reflect the legal rights and obligations of the preference shares, the characterisation would then be determined based on facts and circumstances and a combination of relevant factors. For more information on the characterisation of hybrid instruments, please refer to IRAS' e-tax guide, “ Income Tax: Income Tax Treatment on Hybrid Instruments”.


Consequently, dividends paid/ payable on preference shares are not tax deductible where the legal form or the characterisation of the preference shares is an equity instrument. In such instances, companies should make tax adjustments to add back the dividends (finance costs) notwithstanding that the dividends are recorded as finance costs in the Statement of Comprehensive Income.

Donations

Donations are non-deductible expenses as they are not incurred in the production of income.

However, you can claim tax deduction for donations made to an approved Institution of a Public Character (IPC) or to the Singapore Government which benefit the local community (referred to as "Approved Donations"). For more information on the list of Approved Donations, refer to Donations and Tax Deductions. Revised!

The tax deduction for Approved Donations is allowed on a preceding financial year basis. For example, Approved Donations made during the financial year ending in 2016 will be allowed a tax deduction in your tax assessment for the Year of Assessment (YA) 2017.

Claiming Tax Deductions on Approved Donations

The tax deduction for Approved Donations will be automatically reflected in the company's tax assessment based on information from the IPC. A company is required to provide its Unique Entity Number (UEN) to the approved IPC in order to be given a tax deduction on the Approved Donations.

The amount of Approved Donations can be retrieved at the " View Donations" e-Service at mytax.iras.gov.sg. As such, you do not need to state the donation amount in your Income Tax Return (Form C-S/ C). Forms C-S/C do not include such a line item.

How to make adjustments for Donations in your tax computation

Step 1: Add back all donations made (Approved Donations or otherwise) to arrive at the adjusted profit (this is because donations are non-deductible expenses).

Step 2: Claim a tax deduction of 2.5 times* the amount of Approved Donations. You can check the amount of Approved Donations made by the company by using the "View Donations" e-Service available at mytax.iras.gov.sg . Tax deduction on Approved Donations is allowable on a preceding financial year basis.

* To encourage a spirit of giving and build a stronger sense of community, and in conjunction with SG50, Approved Donations made during the period from 1 Jan 2015 to 31 Dec 2015 (both dates inclusive) will be given a tax deduction of 3 times the amount of donation.

Note

  • Estimated Chargeable Income (ECI)
    • When declaring the company's Estimated Chargeable Income (ECI), the company should state the ECI as calculated after taking steps 1 and 2 above.
  • Form C-S/ C
    • The company need not state the amount of Approved Donations in its Form C-S/C, as IRAS will obtain the information directly from the IPCs.
    • When declaring the company's "Chargeable Income (before Exempt Amount)" in Form C, the company should state the amount as calculated in its tax computation, after taking steps 1 and 2 above. There is no need to declare "Chargeable Income (before Exempt Amount)" in Form C-S.

Example 1: Tax Computation for YA 2017

A company with its financial year from 1 Jun 2015 to 31 May 2016 made Approved Donations of $100 in Jul 2015 and $200 in Mar 2016. When preparing its tax computation and Form C-S/ C for YA 2017, the company should do the following:

Net Profit

$1,000

Add: Non-Deductible Items

$  300

Adjusted Profit

$1,300

Less: Approved Donations

$ (800) #

Chargeable Income (Before Exemption)

$  500

# Approved donations made in 2015 = $100
Tax deduction for Approved Donations made in 2015 = $100 x 3 times = $300
Approved Donations made in 2016 = $200
Tax deduction for Approved Donations made in 2016 = $200 x 2.5 times = $500

ECI Return: Declare $500 as the company's ECI.
Income Tax Return: As the tax deduction of $800 ($300 + $500) will be automatically included in the company's tax assessment for the YA 2017, there is no need for the company to state the $800 in the Form C-S/ C. The company should declare $500 as its Chargeable Income (before Exempt Amount) in Form C. There is no need to declare "Chargeable Income (before Exempt Amount)" in Form C-S.

Example 2: Tax Computation for YA 2018

A company with its financial year from 1 Jan 2017 to 31 Dec 2017 made donations of $100 in Feb 2017, of which $80 is considered to be Approved Donations. When preparing its tax computation and Form C-S/ C for YA 2018, the company should do the following:

   
 Net Profit

$1,000

 

Add: Non-Deductible Items

$  100

 

Adjusted Profit

$1,100

 

Less: Approved Donations

$ (200) #

 

Chargeable Income (Before Exemption)

$  900

 

# Approved donations made in 2017 = $80
Tax deduction for Approved Donations made in 2017 = $80 x 2.5 times = $200

ECI Return: Declare $900 as the company's ECI.
Income Tax Return: As the tax deduction of $200 will be automatically included in the company's tax assessment for the YA 2018, there is no need for the company to state the $200 in the Form C-S/ C. The company should declare $900 as its Chargeable Income (before Exempt Amount) in Form C. There is no need to declare "Chargeable Income (before Exempt Amount)" in Form C-S.

 

Summary of the deductibility of Approved Donations

 

Approved donations (including donations with naming opportunity) made during the period 1 Jan 2009 to 31 Dec 2014Approved donations (including donations with naming opportunity) made during the period 1 Jan 2015 to 31 Dec 2015Approved donations (including donations with naming opportunity) made during the period 1 Jan 2016 to 31 Dec 2018

2.5 times deduction

 

3 times deduction

 

 

Any unutilised donation can be carried forward for up to 5 years to offset income for the subsequent YA provided there was no substantial change in the company's shareholders.

For more details on donations and tax deductions, please refer to the segment "Donations and Tax Deductions" at Charities / IPCs.

Employee Equity-Based Remuneration (EEBR) Scheme for Corporate Tax

Incentives offered by a company to its employees in the form of employee stock options (ESOs) or share awards through treasury shares are tax-deductible.

ESOs enable employees to buy a certain amount of shares in the company at a fixed price. Share awards involve giving employees actual shares rather than options. The shares may be free or at a price below the market price.

From YA 2007, companies are allowed a tax deduction when they incur an actual outlay to buy back their own shares to fulfil their ESO or share award obligations. This is in recognition that companies are increasingly linking employee remuneration to the performance of the companies by granting ESOs or share awards as part of the general move towards a more flexible wage system.

The tax deduction is the actual amount incurred by the company, reduced by the amount borne by employees.

From YA 2012, a company may also claim tax deduction on the cost incurred for transferring shares from the holding company to its employees when administered by a Special Purpose Vehicle (SPV).

To qualify, the SPV must be a legal person that can act as trustee of a trust that is set up for the sole purpose of the EEBR Scheme (EEBR trust). If the SPV performs other functions, these functions should not create any conflict of interest with its duties as a trustee.

The timing of tax deduction for both treasury shares and shares administered through a SPV would generally correspond with the vesting of the shares to the employees as follows:

  1. ESOs
    The dates when options are exercised; and
  2. Share Awards
    The dates the shares are vested (i.e. the date when the legal and beneficial interest are transferred to the employee). If there is no vesting condition, then the date of share grant applies.

Where the company is charged for the cost of the shares transferred by its holding company or SPV, tax deduction is allowed when the shares vest to the employees or when the company is liable to pay the recharge for the shares, whichever occurs later.

The amount of tax deduction depends on how the shares are acquired:

  • SPV acquires company's shares from the open market,
  • SPV acquires holding company's shares from the open market,
  • SPV acquires treasury shares of the company, or
  • SPV acquires treasury shares of the holding company.

Details on the deduction available for each of the above scenarios can be found  in Tax Deduction for Shares Used to Fulfil Obligations under an Employee Equity-Based Remuneration Scheme (e-Tax Guide, 264KB).

For more details, please refer to Tax Deduction for Shares Used to Fulfil Obligations under an Employee Equity-Based Remuneration Scheme (e-Tax Guide, 264KB).

Employment Assistance Payment (EAP) or Re-employment of Older Employees)

From 1 Jan 2012, employers must offer a one-off EAP to an older worker if they are unable to find a suitable job for the eligible older employee who wishes to work beyond his retirement age. This EAP is tax-deductible .

To enable more employees to continue working after the statutory retirement age of 62 (or contractual retirement age, whichever is higher), employers are required under the RRA to re-employ their older employees until they reach 65 provided:

  1. The employee is medically fit to continue working; and
  2. The employee's work performance is satisfactory.

Employers are not obliged to make the EAP if:

  1. The eligible employee declines the offer of re-employment;
  2. The employee is medically unfit to continue working; or
  3. The employee's work performance is poor.

Find out more about Re-Employment of Older Employees at the Ministry of Manpower website.

Expenses Incurred before Commencement of Business

Certain businesses may have commenced business before the first dollar of business receipt is earned or before the deemed date of commencement.

Generally, expenses incurred before a business starts its operations are not tax-deductible as these are incurred for the purpose of setting up the operations and not 'wholly and exclusively' for the production of income.

The date of commencement of business is, generally, the day on which the business earns its first dollar of business receipt.

This means that revenue expenses incurred from the date of commencement are tax-deductible.

To assist businesses in enterprise development, a business will be treated as having commenced its operations on the first day of the basis period in which it earns its first dollar of business receipt (i.e. deemed date of commencement of business). From YA 2012, businesses are allowed deduction for revenue expenses incurred one year prior to the deemed date of commencement of business. From YA 2004 to YA 2011, only revenue expenses incurred from the deemed date of commencement of business were allowed deductions.

The above tax treatments are not applicable to companies that are subject to tax in accordance with Section 10E of the Income Tax Act.

The table below summarises the tax treatment for expenses incurred before commencement of business:

Revenue expenses incurred

From YA 2004 to YA 2011

From YA 2012

1 year before the first day of the basis period in which the company earns its first dollar of business receipt (i.e. deemed date of commencement of business)

Non-deductible

Tax-deductible. The revenue expenses are treated as incurred on the deemed date of commencement of business

During the basis period in which the company earns its first dollar of business receipt

Tax-deductible

Tax-deductible

Example

A company was incorporated on 1 Jul 2014. Its financial year ends on 31 Dec. The company first incurred revenue expenses such as rental expenses, utilities, etc. on 1 Sep 2014. It earned its first dollar of business receipt on 1 Sep 2016.

A summary of the above events is as follows:

summary flowchart

 
The table below shows the deductions for expenses incurred before the commencement of business:

Revenue expenses incurred from

Tax Treatment

1 Sep 2014 to 31 Dec 2014 (YA 2015)

Non-deductible. The revenue expenses are not incurred 1 year prior to the deemed date of commencement of business, which is 1 Jan 2016.

1 Jan 2015 to 31 Dec 2015 (YA 2016)

Tax-deductible in YA 2017. Revenue expenses incurred during the period are treated as incurred on 1 Jan 2016*

The expenses incurred in 2015 should not be claimed in YA 2016, as the company has not commenced business yet. Please claim deduction of the revenue expenses incurred in 2015 in YA 2017, as the deemed date of commencement of business is 1 Jan 2016.

1 Jan 2016 to 31 Dec 2016 (YA 2017)

Tax-deductible as the business is treated as having commenced on 1 Jan 2016.

Determining the Actual Date of Commencement


When the business has established its profit-making structure and started its first commercial activity, it can be regarded as having commenced business even though it may not yet have earned its first dollar of business. If the business is able to substantiate this, all revenue expenses incurred from the actual date of commencement of business will be tax-deductible.

A business which provides fund management services is regarded by IRAS as having established its profit-making structure and started its first commercial activity when it is ready to market its services and conclude contracts with its potential clients.

Using the example above, if the business of fund management is ready to market its services and conclude contracts on 1 Sep 2014, then IRAS will accept that business has commenced on 1 Sep 2014 (ie. in YA 2015). All revenue expenses incurred by the business from that date onwards will be deductible for tax purposes.

Please refer to Determination of the Date of Commencement of Business (e-Tax Guide, 80KB) for some guiding principles and other examples on determining the date of commencement of a business.

For more details, please refer to Concession for Enterprise Development - Deduction of Certain Expenses Incurred before Business Revenue is Earned (e-Tax Guide, 136KB).

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