As already mentioned in our blog posts (link to section), the Income Tax Ordinance defines recognized expenses as “expenses to generate income”. In the same ruling there is a list of expenses that are not recognized in principle. And also there is such a category as “mixed costs”. These are expenses of an entrepreneur that may arise for both personal and business purposes. In this case, the tax authorities allow you to recognize only a part of the relevant expenses.
Expenses for snacks in the office (cold or hot drinks, biscuits, sweets, etc.) are mixed expenses that are part of selling expenses and are partly considered by the tax authorities as private expenses. No more than 80 percent of the costs under this item can be included in the annual report to the Mas Akhnasa. In July 2018, the IRS updated the definition of snacks to include seasonal fruits and vegetables. Costs for light meals will be recognized for both guests and employees in the workplace, even if the entrepreneur works from a residential apartment. Other recognized expenses for freelancers can be found in the article “Tax Optimization for Freelancers Working from Home"
It is important to note that there is no VAT refund for all expenses on light meals.
All expenses for light meals outside the office, including meals in restaurants, are not recognized at all, even if these are expenses for business meetings with the purpose of marketing and business promotion.
The position of the tax service in this case is that staying in a cafe, including working in front of a computer and meeting with suppliers and customers, does not fall under the definition of office maintenance.
The cost of food for employees will be recognized in full only if the employer adds the cost of food to the employee’s payroll (tlush maskoret) and the employee pays tax for the financial benefit he has received.
The costs of receiving guests in the office or organizing meetings with them in the town of the entrepreneur are not recognized. An exception is the reception of guests from abroad and only if it is possible to document the relationship between the cost of hosting an overseas guest and the increase in business income.
In this case, the costs should be properly reported. Namely, the name of the guest, the country from which he came, the number of days of stay, the connection with the business and the amount of expenses are recorded. When the costs of receiving guests from abroad, including meals, have reasonable limits and are incurred for the purpose of generating income in the business, then they will be recognized without restrictions.
Expenses on gifts to guests and business partners are also recognized only upon confirmation of their direct connection with the prospect of increased income. There are restrictions of 210 shekels per year per person in Israel and $ 15 per year per person from abroad.
Gifts to employees on the occasion of a personal event are allowed. The condition for deducting expenses in this case is a report indicating the name of the recipient of the gift and the place of presenttion. The cost of holiday gifts for employees will be recognized in full, provided that the employer adds the value of the gift to the employee’s payroll (tlush maskoret) and the employee, in turn, pays the appropriate taxes.
Be generous with your partners and employees and your generosity will definitely come back to you. At least through economizing on taxes .
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