Deductible or not? The expense claims owners get wrong

The deduction rule sounds simple: under s14 of the Income Tax Act 1947, expenses are deductible when they are wholly and exclusively incurred in the production of income, and are revenue rather than capital in nature (s15 lists what is prohibited). The trouble is in the application — and a handful of items account for most of the errors IRAS finds in small company computations.

The usual suspects — not deductible

• S-plate car expenses. Private passenger car costs — rental, petrol, parking, upkeep — are specifically disallowed, no matter how real the business use. This is the single most common add-back.
• Private and personal expenses. Family meals, home expenses, personal travel routed through the company fail "wholly and exclusively" immediately. They can also raise harder questions — see don't run the company like your own.
• Estimated expenses and provisions. General provisions and accruals without an incurred obligation are not deductible until the expense crystallises.
• Fines and penalties. Breaching the law is not a cost of producing income.
• Medical expenses above the cap. Deductible only up to 1% of total employee remuneration (2% with qualifying portable medical benefits).
• Interest, where borrowings fund non-income-producing assets. Interest is apportioned; the share attributable to such assets is disallowed.
• Pre-commencement costs — with one important concession below.

Capital vs revenue — the other axis

A perfectly business-justified purchase can still be non-deductible because it is capital: equipment, computers, furniture, fit-out. These earn capital allowances — tax depreciation, typically claimable over one to three years for plant and machinery — rather than an outright deduction. Allowances are also elective: in a loss year you can defer claims to preserve them, subject to the carry-forward tests.

Two reliefs matter to new companies:

• Renovation and refurbishment (s14N). Shop and office fit-out that is neither repair nor structural work is deductible up to S$300,000 per three-year period.
• Pre-revenue costs (s14U). Revenue expenses incurred up to one year before the accounting year of your first business receipt are deemed deductible. Spend earlier than that window and the deduction is generally lost — worth knowing before a long, expensive build-up to launch.

How to keep your computation clean

1. Separate accounts from day one — a business bank account and card, so private items never enter the ledger.
2. Tag doubtful items as they occur, not at year end; your accountant resolves a labelled question in minutes.
3. Keep the source documents — a deduction you cannot substantiate is a deduction you do not have.

Add-backs are not penalties — every company has them. Problems start when private spending is hidden in business categories rather than adjusted openly in the tax computation. Disclose and adjust, and the computation is routine; disguise, and it becomes something else entirely.