You will be able to sort your spending into allowable business expenses, capital items and private spending.
Mei bought a new phone last month. She uses it to message clients, send files and take photos of work in progress. She also uses it for family chats, food delivery and scrolling at night. Can she claim it as a business expense? Most freelancers would say either "of course" or "probably not", and both answers are wrong. The honest answer is "part of it", and working out which part is what this lesson is about.
IRAS's test for whether a business expense is deductible is that it is incurred wholly and exclusively in the production of your income. In plain words: you spent the money to earn your business income, and for no other reason.
Software you use only for client work passes. So does a train ride to a client's office, a stock photo licence for a client project, a domain name for your portfolio site, or a fee to a platform that finds you work. Each one exists because of the business.
The test is about purpose, not about whether the item is related to your work in a loose way. A good camera bag for a photographer passes. A gym membership for a personal trainer who trains clients only in parks probably does not, because the membership is for her own fitness. If you have to argue hard that something counts, it probably does not.
Private and domestic spending is spending on your own life rather than the business, and IRAS does not allow it as a business expense. Your rent, your groceries, your clothes and your own holidays fall into this group, even if you sometimes think about work while on holiday.
Many items fall in between. A phone, a home internet line, a car you use for both work and family: these are mixed items. For mixed items, you can claim the business share, worked out on a fair and reasonable basis, and you keep a note of how you worked it out.
For Mei's phone plan, with figures made up for the example, she looks at a typical month. About 40% of her usage is client calls, messages and file transfers. Her plan costs S$80 a month, so she claims S$80 multiplied by 40%, which is S$32 a month, or S$384 for the year. She writes one line explaining the 40% and keeps it with her records. If IRAS asks, the note is her answer.
Working from home is a common case. IRAS has specific guidance on whether any part of home costs can be claimed by a self-employed person and how. Read it before you claim anything for your home, because this is an area where people often overclaim.
If you drive taxi or private hire, IRAS also has a separate arrangement that may let you claim a fixed share of your income as deemed expenses instead of listing every receipt. Check on the IRAS website whether it applies to you and how it works.
Some purchases last for years: a laptop, a camera, a set of studio lights, a vehicle used for the business. These are capital items. You generally cannot claim the full cost as an expense in the year you buy them. Instead, you claim capital allowances, which spread the cost over a period IRAS allows.
IRAS sets out the options, including faster write-offs for lower-value items, on its website. The detail changes, so check the current rules for the year you buy.
Here is a made-up example. Mei buys a S$2,400 laptop used only for her design work. If the rules she chooses spread the cost over three years, she claims S$2,400 divided by three, which is S$800, in each of those years. A capital item used partly for private purposes is claimed on its business share, in the same way as a phone plan.
Tax reliefs, such as relief for some CPF contributions, are a different thing from business expenses. Expenses reduce your trade income. Reliefs reduce your chargeable income for personal reasons. Tax & Reliefs covers reliefs in depth. This lesson is about business expenses only.
The quickest way to learn the test is to apply it to real items. Take one month of your spending and put each item into one of four groups:
Business: incurred only to earn your trade income, claimed in full. Private: your own life, not claimed. Mixed: partly business, claimed on a fair business share that you write down. Capital: equipment that lasts several years, claimed through capital allowances.
When Mei did this, the month had 31 items. Twelve were business, fourteen were private, four were mixed and one was capital, the laptop. Her mixed items were her phone plan, her home internet, a co-working day pass she also used to meet a friend, and her car park charges. She wrote a share for each and a short reason.
Keep the result. It becomes the first page of the records system in lesson 4.3. Have last month's bank and card statements in front of you, and start sorting.
Take last month's spending and mark each item as business, private, mixed or capital, with a business share for mixed items.
Junxiong-WFG Organisation is an authorised representative of AIA Financial Advisers Private Limited (Reg. No. 201715016G).