Tax Optimization for a Business in Israel: Expenses Related to Vehicles
Many entrepreneurs are familiar with the concept of “recognized expenses" (hotsaot mukarot) and use this opportunity to reduce the amount of tax payable (nikui mas). We have already discussed the topics of accounting for expenses on a business trip around Israel and on business trips abroad, as well as the nuances of showing these expenses in tax reports. In this article, we will talk about which expenses related to a car can become hottsayot mukarot, and which cannot.
Recognition of expenses related to a car for the atzmai
Tax authorities distinguish among the uses of a vehicle in business:
according to weight – under 3.5 tons (passenger car) and over 3.5 tons (truck),
and as for the passenger car – according to the frequency of use.
When a business uses a passenger car that weighs up to 3.5 tons, this is a so-called mixed expense, that is, partly personal, partly business expense, and it is not fully recognized by either the VAT authorities (MAAM) or the income tax authorities (Mas Akhnasa).
In order to gain recognition of expenses, it is important to record them meticulously throughout the year. In the annual report, everything is displayed in the “car maintenance" section – insurance, gasoline, parking, toll roads, repairs, rent, etc. Losses from theft or vandalism may become partly recognized expenses.
And, pre-empting a usual question – no, fines cannot be filed as expenses.
In most cases, MAAM considers that two-thirds of the input VAT on operating costs of the vehicle, such as fuel, oil change and repairs, can be deductible. Another third is not reimbursed under the MAAM, but is added to the income tax calculations in Mas Akhnasa.
If the area of business does not involve active use of a car, then most trips are recognized by the tax authorities as private and only a small part are recognised as business travel. For example, if an atzmai provides translation, copywriting or other similar services. In such a situation, MAAM will allow you to deduct 25% of the VAT.
When buying a car.
MAAM will not recognize value-added taxes on the purchase of a passenger car. Also MAAM absolutely does not recognize in VAT the expenses on car leasing and rental.
From the point of view of Mas Akhnasa, the cost of purchasing a car is not included in operating expenses, but is written off as depreciation of fixed assets (depreciation, in Hebrew pkhat) over seven years and at the rate of 15% per year of the value of the car.
For private entrepreneurs – osek patur and osek murshe – 55% of the current transport costs and depreciation are not recognized, and the remaining forty-five percent (45%) are recognized costs.
Recognition of the expenses relating to a passenger car for the Hevra Baam
In the case of a Hevra Baam, the recognition of expenses by tax authorities depends on the forms of use of the car.
For example, for the tax authorities such a car will be called a “reserve vehicle" and 100% of transport costs will be recognized for it:
The vehicle is not attached to a specific employee, but is used by everyone as needed and is in the operating parking lot outside of working hours.
The vehicle is not attached to a specific employee, but is used by everyone as needed and is in the operating parking lot outside of working hours, BUT at the end of the working day and on weekends, one of the employees takes the car home.
In the cases described above, there are established tax instructions: compulsory maintenance of a vehicle entry and exit logbook, rules for the use of official parking, etc.
But in Israel, a more common situation is when the vehicle is attached to a specific employee. And in this case, the tax office considers that providing a car to an employee is a benefit or a virtual bonus to the salary, which is a non-monetary reward for the employee in the form of using a car. For this supplement to the salary, the employee must pay income tax and social security, as if this amount were his income.
The cost of using a car for an employee (in Hebrew shovi shimush be-rekhev) will be 2.48% of the cost of a new car.
In this case, the employer can return from MAAM two-thirds of the VAT on transport costs on the assumption that most of the costs are related to business.
It is important to note that for the tax authorities commuting from home to work is not a business trip.
From the point of view of the Mas Akhnasa, all vehicle-related expenses for the employer will be recognized in the income tax: depreciation, leasing, insurance, fuel, maintenance, repairs, replacement of parts and so on.
By the way, some employees prefer not to receive a car from the employer, but to have “transportation costs” reimbursed on a monthly basis. The payment of these amounts represents remuneration, and the employee is required to pay income tax and social security on this supplement to salary.
Recognition of expenses for a vehicle over 3.5 tons (truck)
The situation is completely different in the case of a truck weighing more than 3.5 tons. In this case, both tax authorities recognize all costs.
You can get 100% VAT refund both for the purchase price of the vehicle and for current expenses.
Attaching a vehicle to an employee does not require adding the cost of using the vehicle to his salary, because, in fact, the vehicle is his working tool, and not a benefit.
The Mas Akhnasa recognizes the running costs of the vehicle in full and recognizes an annual depreciation expense on the purchase of a truck at 15% of its price.
Owners of diesel trucks have an additional perk/perquisite/ – they can return the excise tax on diesel fuel (in Hebrew hekhzer blu al solar).
In conclusion, I would like to remind you that the Israeli tax authorities punish very harshly for attempts to “recognize as expenses" more than a business person is actually supposed to. Therefore, if you have questions or doubts, it is better to consult with your accountant.