The 400% AI deduction: what qualifies, and what won't

Budget 2026 gave Singapore businesses a reason to read their software invoices more carefully. For YA 2027 and YA 2028 only, a business may claim 400% tax deductions on up to S$50,000 a year of qualifying AI expenditure (IRAS).

Two things make this worth understanding now rather than at filing time. The first is timing: income is assessed on a preceding year basis, so for a company with a 31 December year end the YA 2027 basis period is the 2026 calendar year (IRAS). That period is already running. The second is that what qualifies is narrower, and more paperwork-dependent, than "we spent money on AI".

The detail below follows IRAS's own guidance. The measure is set out in Annex F of the Enterprise Innovation Scheme e-Tax Guide (Third Edition), published on 31 August 2026 (IRAS), alongside the Ministry of Finance's responses to the public consultation on 2 September 2026.

What the deduction is worth

IRAS puts it as 400% on the first S$50,000 of qualifying AI expenditure for each YA. That figure is reached in two steps, and the distinction matters if you are building a tax computation. The deduction is A × B%, where A is the lower of your qualifying AI expenditure for the basis period and S$50,000, and B is:

• 300% where the expenditure is already allowable as a deduction under s14 — the ordinary rule that a business expense is deductible once; or
• 400% where it is not.

In other words, for ordinary revenue spending the section grants 300% on top of the 100% you already get — which is why the headline reads 400%. The two figures describe the same outcome, not a conflict.

At the ceiling, S$50,000 of qualifying spend produces a S$200,000 deduction, worth up to S$34,000 at the 17% corporate rate. The cap is annual, and where it bites depends on how you are structured. IRAS applies it at the company level for a company — so companies in the same group are each capped separately — at the sole-proprietor level regardless of how many businesses that proprietor runs, and at the partnership level regardless of the number of partners.

What counts as qualifying AI expenditure

IRAS defines it as expenditure on either:

1. the subscription to, or licensing of, an AI system; or
2. the subscription to, or acquisition or licensing of, a qualifying AI business service.

An AI system is defined as a machine-based system that, for explicit or implicit objectives, infers from its inputs how to generate outputs such as predictions, content, recommendations or decisions. IRAS lists capabilities that bring a system within the definition — content generation, reasoning and problem solving, knowledge retrieval and representation, natural language processing, automated planning and optimisation, and multimodal processing such as image recognition or audio-to-text. Adding those examples to the legislation was itself a consultation request, which MOF accepted on 2 September.

A qualifying AI business service is a service supporting the adoption or development of AI in your business, relating to the development, deployment, operation or maintenance of an AI system. IRAS names seven: an online platform for your use, system development, consultancy and strategy, data and analytics, research and development, system engineering and compliance, and system-related training.

That second limb is broader than most owners expect. The consultant who designs your AI workflow, and the training that teaches your staff to run it, are capable of qualifying alongside the subscription itself.

What is excluded

This is where claims will go wrong.

• Hardware and physical infrastructure. Excluded outright. Respondents asked for hardware wholly and directly attributable to an AI system to be brought in; MOF declined on 2 September, on the basis that hardware is usually usable well beyond AI. A server bought to run models is not deductible under this section, though it may still attract ordinary capital allowances.
• Anything subsidised by a government grant. Expenditure is excluded to the extent it is or will be subsidised by a grant or subsidy from the Government or a statutory board — so a part-funded project qualifies only on the portion you actually bear.
• Spend already claimed elsewhere. No deduction where the same expenditure is deducted under s14A, s14C, s14D, s14EA, s14EB, s14U or s14ZG — the provisions behind the existing Enterprise Innovation Scheme activities. AI training that already sits in an EIS training claim cannot be counted twice.
• Systems you have written down. No deduction where an allowance has been made in an earlier YA under s19 or s19A for the same AI system, or where you sub-license the system to someone else during the basis period.

The bundled-invoice problem

Most SME software does not arrive labelled "AI". It arrives as a suite where some modules use AI and some do not, on a single monthly fee.

The guidance handles this directly. Where a single payment is partly non-qualifying and there is no readily available evidence of the split, you must apportion it in a manner that is reasonable in the circumstances — and if the Comptroller is not satisfied the apportionment is reasonable, they may substitute their own judgment.

Respondents asked for something easier: let businesses rely on the vendor's breakdown, and where none exists, deem a fixed percentage of bundled spending to be AI. MOF accepted the first and refused the second. Where separate pricing is available, claim on that basis; where it is not, make a reasonable estimate. There will be no safe-harbour percentage, because, as MOF put it, the right proportion differs across claims.

The practical consequence is dull but valuable: ask your vendors for an AI/non-AI breakdown on the invoice now, while you are still inside the basis period. A breakdown obtained at renewal is evidence; a percentage reconstructed eighteen months later, at filing, is an argument. Keep it with your other tax records.

There is no cash payout on this one

The rest of the Enterprise Innovation Scheme lets an eligible business convert qualifying spend into a 20% cash payout — useful when there is no taxable profit for a deduction to reduce. That option does not apply here. IRAS says so plainly, and the cash payout provision at s37R is unchanged.

For a pre-profit company, then, this measure produces a larger loss to carry forward rather than money in the bank. That is worth something later, subject to the usual conditions on carrying losses forward — but it is not cash, and it should not be budgeted as cash.

What to do before YA 2027

1. Separate AI line items in your accounts from the start of the basis period, rather than sorting them out at filing.
2. Ask vendors to price AI and non-AI components separately — or at least to state a breakdown in writing.
3. Track grant funding against the same spend, since the subsidised portion drops out.
4. Check for overlap with any existing EIS claim before counting the same invoice twice.
5. Do not buy hardware for the deduction. It does not qualify, and the measure is too small to justify distorting a purchasing decision — S$34,000 at the very top is real money, but it is not a reason to spend S$50,000 you had no plan to spend.

The operational detail most likely to be refined in practice is the treatment of bundled subscriptions, where IRAS has declined to set a safe-harbour percentage.