What is allowable and disallowable income and expenses?

Answer 1

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 privatein 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)

Examples of Allowable Business Expenses Staff costs

• Employees' salary, bonus, allowances
• Compulsory CPF contributions by employer
• Retrenchment benefits
• Insurance for employees
• Employees' medical expenses up to 1% of their total remuneration (up to 2% if you as the employer are implementing either the Portable Medical Benefits Scheme or the Transferable Medical Insurance Scheme, has provided employees with portable medical shield plans or made ad hoc Medisave contributions for employees). Total remuneration includes employees' salaries, allowances, bonuses and allowable CPF contributions. Employee's remuneration excludes sole-proprietor and partner's salary, bonus, allowances, Medisave and CPF contributions as well as foreign workers levy.

Running costs

• Rent, utility, and telephone charges for the business
• Stationery and postage fees
• Advertising costs
• Upkeep of business premises, equipment, and machinery
• Upkeep of motor vehicles such as motorcycles, pick-ups, vans, buses and lorries
• Cost of travelling on public transport in the course of business
• Repairs and maintenance of assets used for business
• Trade debts which become bad and irrecoverable during the accounting year
• Business licence renewal fee
• Capital allowances on fixed assets purchased for business use
• Qualifying expenditure incurred on renovation or refurbishment works
• Research and Development expenditure

Finance and professional costs

• Interest on money borrowed for use in business
• Hire purchase interest
• Accountancy fees
• Legal fees incurred in recovering trade debts, renewal of leases

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Disallowable Business ExpensesExamples of Disallowable Business Expenses Staff Costs

• Employees' medical expenses exceeding 1% of their total remuneration (2% if you as the employer are implementing either the Portable Medical Benefits Scheme or the Transferable Medical Insurance Scheme, has provided employees with portable medical shield plans or made ad hoc Medisave contributions for employees). Total remuneration includes employees' salaries, allowances, bonuses and allowable CPF contributions. Employee's remuneration excludes sole-proprietor and partner's salary, bonus, allowances, Medisave and CPF contributions as well as foreign workers levy).
• CPF contribution for your employees above the statutory limit
• Your own salary, bonus, allowances, and Medisave/CPF contributions
• Your own personal drawings, medical fees, income tax, insurance, and donations

Private expenses

• Food, household and entertainment expenses for yourself, family members, and friends
• Cost of travelling to and from your home
• Insurance premiums for policies taken on the sole-proprietor's life
• Club subscriptions and entrance fees paid for the sole-proprietor's membership
• Medical expenses incurred on the sole-proprietor
• Sole-proprietor's personal income tax
• Travelling expenses for personal trips

Private Hire Cars/Private Cars Expenses

• Expenses incurred directly or in the form of reimbursement on using private hire cars or private cars (E, Q or S-plate cars). Examples: repair, maintenance, parking fees, petrol costs
• These expenses are not deductible even if the private cars were used for business purposes

Remuneration paid to related parties

• Remuneration paid to the sole-proprietor / partner's related parties such as his parents, spouse, children and siblings who are not working in the business.
• Excessive salary, bonus and commission paid to the sole-proprietor / partner's related parties that are not in line with market rate (not arm's length). Payments made to the related parties should commensurate with the actual services performed by them (reasonable as compared to an independent employee with the same qualification and experience performing the same services).

Capital Expenses

• Business start-up expenses such as licence fee, registration fee, signboard fee
• Purchase of fixed assets
• Depreciation of fixed assets (Claim capital allowances)
• Renovation costs (except for qualifying expenditure which can be claimed under Section 14Q deduction)
• Capital contributions or withdrawals
• Legal fees and stamp duty on new lease agreement

Other Disallowable Expenses

• Repayment of loans
• Interest on loans obtained for private use
• Fines and penalties
• Prayer expenses