Not all expenses are created equal.
More so for Small and Medium-Sized Businesses (SMBs), knowing where your money goes and the budgets to channel them can help you to make smarter spending decisions to maximize cash flows. For start-ups looking to fuel their expansion, tracking one’s spending and ensuring accuracy in bookkeeping can help you to attract more investors.
Categorizing business expenses can appear tedious at first. But, when you start to develop these categories at the very start or early on in your operations, they can mean the world for small business owners moving forward, especially during tax time and helping you to identify performance metrics that you can work with.
This article gives you the basic principles of properly categorizing your business expenses in Singapore.
In Singapore, business expenses are costs incurred to generate sales. Some examples include CPF contributions, wages, renovation, advertising, etc. A business expense can be tax deductible or non-deductible.
When an expense is deductible, this means that they reduce the amount of tax you need to pay. The Inland Revenue Authority of Singapore (IRAS) classifies them as expenses “wholly and exclusively incurred in the production of income.”
The general rules of expenses that qualify for tax deductions are:
- Must be incurred: Regardless of the actual payment date, expense is “incurred” when the legal liability to pay has arisen
- Must be related to your business: Must show why expense has to be incurred to earn the income
- Must not be personal or private in nature
- Must be depreciation of capital/fixed assets, and not its purchase
- Must be supported by proper and complete source documents: Keep at least 5 years to substantiate claims
Non-deductible business expenses are incurred from non-business-related activities that your employees and yourself pay for. This includes personal expenses such as travel or entertainment not related to the running of the business, and capital expenses such as expenses incurred to incorporate a company and purchase of fixed assets.
Here’s an explainer video by IRAS distinguishing the two:
A general rule of thumb for SMB owners for what expenses you can write off is that it has to be “ordinary and necessary”: “Ordinary” implying it must be common and accepted in your trade, and “necessary” implying that it is helpful and appropriate for your business purpose.
In this section, we highlight some of the typical expenses incurred for business purposes by SMBs and whether or not they are tax-deductible in Singapore.
|Expense Type||Description||Tax deductible?|
|Rent or mortgage payments||Includes costs incurred by a business to utilize a business property or location for an office, retail space, factory, or storage space. For mortgage cost, it is largely made up of loan interest and principal payments.||Yes|
|Utilities||Includes heat, electricity, water and telephone bills.||Yes|
|Furniture, equipment, and machinery||Includes raw materials, machinery, maintenance and upkeep of fixed assets, and other expenses to manufacture and process products.||No (Instead, claim under capital allowances)|
|Office supplies||Includes costs of replenishing paper, pens, business cards, and other stationery. When you first move into an office space or after a long period of time, you may also have to buy or replace equipment like desks, computers, and printers.||Yes|
|Advertising and marketing||Includes physical advertisements in newspapers, on billboards, on the Internet and social media.||Yes|
|Website and software expenses||Includes costs of website design, copywriting, and other technical set-ups. Also includes software-as-a-service (SaaS), platform-as-a-service (PaaS), and infrastructure-as-a-service (IaaS) expenses.||Yes|
|Entertainment||Includes costs incurred from any activity that provides entertainment, amusement, or recreation.||Yes, except for entrance fees for country clubs or other clubs.|
|Business meals and travel expenses||Includes costs of the business travel (flight, train ticket, hotel cost, etc.), subsistence expenditure (food and drink consumed during the time you travel), and any other costs that came about because you made the journey.||Yes|
|Vehicle expenses||Includes upkeep, maintenance, running and financing commercial vehicles, e.g. van, lorry and bus.||Yes, except for S-plated and RU-plated cars. (Note: Certificate of Entitlement (COE) for motor vehicles is not tax deductible)|
|Employee/staff costs||Includes salary, bonus, allowances of employees; medical expenses; retrenchment benefits; employee health insurance; foreign workers’ levy; and compulsory CPF contributions by employer.||Yes (Note: Retrenchment payments where there is no cessation of business is tax deductible)|
|Business insurance||Includes property and liability insurance for catastrophes like fire, theft, and vandalism, and insurance premiums paid. Depending on the nature of your business, you may also pay for specialized costs like malpractice or product liability insurance.||Yes|
|Business licenses and permits||Includes company registration fees, additional incorporation trademark, patent, and copyright registration fees.||Yes|
|Interest payments and bank fees||Includes monthly service fees, overdraft fees, check-writing fees, and ATM fees.||Yes|
|Membership fees||Includes cost of membership to professional organizations, monthly subscription costs for industry publications, and conference or seminar fees.||Yes|
|Professional services (agencies, consultants, independent contractors)||Includes legal fees such as costs for document review, negotiation with investors (if you plan on accepting investor funds), and due diligence to ensure that M&As and fund injections are legally-compliant.||Yes, only for trade and revenue transactions.|
|Training and education||Includes costs associated with courses and materials needed to analyze, design, develop, implement, evaluate, and maintain employee training or retraining.||Yes|
Also to bear in mind new expenses that started since COVID-19 happened, the office is amalgamated with the home. That said, IRAS recognizes the complexity of accounting for the exact amount of running expenses with the home office set-up and is prepared to accept the following proxies deductible on your employment income:
- The difference in your electricity and telecommunication charges before and after working from home
- Wifi monthly subscription fee can be claimed only if Wifi was set up to enable you to work from home
- With more than 1 person working from home in the same household, IRAS can accept an equal apportionment basis for computing the amount of shared expenses applicable to each person
Finance teams can spend up to 200 hours a month managing business expenses.
Alongside the evolving role of the CFO from the number-cruncher stereotype to becoming more of a strategic player in the company, it is important that you are on the lookout for digital products that will help them become more efficient with their time.
Here are a number of ways for small businesses to manage, track, and categorize their expenses:
- Access payables and receivables data anytime, anywhere
- Easier collaboration on the Cloud
- Save time automating manual and repetitive tasks
- Connect your bank and credit accounts
- Track employee expenses in real-time, upload receipts
- Automate invoice payments, approvals, and bank transfers
- Manage international transfers
- Everyone gets a card: Issue instant, unlimited credit cards to employees
- Pain-free expensing: Freeze and unfreeze spending with a click
- Integrate your SaaS subscriptions with a virtual credit card
Small businesses are well-positioned to move its expense management processes on the Cloud, as it enables them to leverage upon a wide range of services within cost-effective means.
Being able to access these services anytime, anywhere and on any device with only an internet connection translates into cost and time savings. This in turn enables profits through accelerated communication with customers and suppliers, better organization and improved internal processes.
Get started with integrating your finances by speaking to our representative at Spenmo here.