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  • Writer's pictureשוהם שאוליאן, רו״ח (עו״ד)

The guide to deductible expenses for tax purposes

The image depicts a young man engrossed in paperwork at his desk in a well-lit, organized office setting. He is seated, focused on reviewing and writing notes on several documents. The desk is equipped with a lamp, a laptop, a cup with pens, and a small potted plant, contributing to a functional and pleasant workspace atmosphere. This setup suggests a scene of diligent work, possibly related to finance, administration, or academic study.

Since income tax in Israel is imposed on the taxable income (the "profit") of the business, the Israeli Income Tax Ordinance allows a deduction of expenses from the business revnue.

Understanding which expenses are deductible for income tax purposes is essential for businesses to effectively manage their finances and reduce tax liability. These expenses are the costs incurred by the business during the generation of the income, which are deducted from its income to calculate the taxable income.

Recognizing deductible expenses plays a significant role in business tax planning. Proper management of these expenses can lead to significant tax savings and improved financial stability.

The conditions for recognizing the expense as a deduction for income tax purposes

The Income Tax Ordinance, and especially section 17, outlines the parameters for expenses that will be considered deductible. To be considered eligible for deduction, an expense must be incurred specifically for generating business income and should not be for personal use.

  • Directly related to income generation: the expenses must be an integral part of the business activity and contribute directly to income generation.

  • Exclusive business purpose: Only expenses for business activity can be deducted. Personal expenses, even if made in a business context, are not eligible.

  • Reasonableness and necessity: the expenses must be justified and reasonable. Extravagant or unrelated costs are generally not deductible.

Partial deduction

Not all expenses are fully deductible. In some cases, only a portion of the expense may be eligible for deduction. For example, that is the situation with car maintenance, a mobile phone, trips abroad, personal travel expenses, refreshments, gifts and professional clothing.

On the other hand, certain expenses, such as payments made in restaurants or cafes during work, are not considered deductible at all. This classification includes costs that do not fit into the framework of "office services" or necessary business expenses, even if the office meetings are held exclusively in restaurants or cafes.

Maintaining detailed records and correctly classifying expenses is essential for accurate tax filing and avoiding legal complications. Accurate tracking and classification of expenses is essential, and not only helps in claiming legitimate deductions but also in providing clear records during audits by the tax authorities.

By understanding the criteria for deductibility and consulting with accounting and tax professionals, businesses can optimize their financial stability and comply with the provisions of tax laws, thereby protecting against possible penalties and improving overall financial performance.


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