Amidst the bustling business landscape of Singapore, the Inland Revenue Authority of Singapore takes center stage as the anchor of financial harmony. From curating laws for transparent financial management to ensuring the adherence to the regulations, the IRAS manages everything that a business would need to carry out its financial operations with the assurance that the regulations are fair.
What is IRAS, and what does it do?
The IRAS is the principal tax authority in Singapore responsible for administering and enforcing tax laws for Singaporean businesses and individuals. The IRAS has several significant functions, such as:
- Tax collection: Businesses and individuals pay their taxes to the IRAS to support national growth and development.
- Tax policy development: Tax policies are dynamic when viewed over the span of decades, and the IRAS is in charge of formulating these tax laws.
- Ensuring tax compliance: For national development, it is important that businesses and individuals dutifully pay taxes on time. The IRAS looks over this.
- Providing taxpayer assistance: Wherever a taxpayer, whether a company or an individual, needs assistance to fulfill their tax obligations, the IRAS ensures that they’re provided with timely assistance.
- Conducting tax audits: To maintain the tax system’s integrity, IRAS is responsible for verifying the accuracy of tax declarations and detecting any instances of fraud.
- Providing tax incentives: The IRAS administers various tax incentives to encourage economic activities.
- Managing international taxation: The IRAS promotes cross-border payment activities and ensures all transactions abide by the tax regulations.
In Singapore, companies are required to file tax returns. When they do so, they are required to provide a detailed report of the business expenses. The report should include all expenses you have made to run and grow your businesses. While there can be many expenses that a company has to make to grow and sustain itself, the bright side is that not all expenses are subjected to taxes.
The IRAS has prepared an official list outlining the deductible and non deductible expenses IRAS. Keep reading to understand what these terms mean.
What are deductible expenses?
Deductible expenses are business costs that the IRAS allows businesses to subtract from the earned income, reducing your company’s taxable income. In other words, if you have less taxable income, you must pay less tax!
What qualifies as deductible expenses?
According to the IRAS policy, deductible expenses arise exclusively from the activities that generate your company’s income. Additionally, the expenses must come from revenue, not from business capital. The expenses should also not be those that are prohibited from deduction under the Income Tax Act. Some examples include:
- Fees for accounting services
- Expenses related to administration
- Costs for promoting products/services
- Compensation paid to auditors
- Occasional contributions to employees’ Medisave accounts
- Charges from banks
- Cash used to add to Employees’ CPF Minimum Sums
- Expenses for magazines and newspapers
- Digital taxes based on revenue (not income)
- Payment to directors for their services
- Payments under the Employee Equity-Based Remuneration (EEBR) Scheme
- Loss from changes in currency exchange rates (related to trade and revenue)
- Cost of insurance to cover bad debts
What are non-deductible expenses?
Contrary to deductible expenses, non-deductible expenses are those that don’t count toward generating business income.
What qualifies as non-deductible expenses?
According to the IRAS, the expenses made to acquire assets, pay for company registration, and the personal expenses made by employees are considered non-deductible.
Some examples include:
- Obtaining assets that can’t be easily converted to cash
- Spreading the cost of an asset over its useful life
- Uncollectible debts from non-business sources
- Obligations incurred before business operations start
- Fees for obtaining a Certificate of Entitlement (COE) for vehicles
- Digital taxes are treated like regular income taxes
- Payments to shareholders of preferred shares
- Gifts or charitable contributions
- Loss from unfavorable currency exchange (not related to business or capital)
- Penalties or fines
- Payments for acquired reputation or brand value
- Reduction in value of non-business-related debts
A question that may arise in your mind after reading the distinction between deductible and non-deductible expenses must be how employees’ personal expenses correlate with business expenses. The answer lies in a simple word – Reimbursements. When a company reimburses an employee for a non-deductible expense, the reimbursement itself would be taxable as it is a business expense.
On a concluding note, the IRAS is responsible for all tax-related operations. The IRAS has listed what expenses are taxable and which aren’t for businesses. Understanding this distinction can help businesses save on taxes and refine reimbursement policies.