Every year during the tax season, many bosses have a headache when it comes to filing tax returns: Which of the many expenses can be deducted legally to help the company save more money?
Core Principles of Tax Deduction
According to section 16 of the Hong Kong Inland Revenue Ordinance, the most basic principle of tax deduction can be summarized in one sentence:The expenditure must have been incurred for the purpose of producing taxable profits of your company.。
In other words, you must be able to prove to the Inland Revenue Department that the expenditure is directly and necessarily related to the income earned from your business.
The “principle-based” system is flexible, but at the same time requires enterprises to keep clear and complete supporting documents. When conducting audits, the IRD adheres to the principle of “principle-based".“No record, no tax deduction” stand.
According to the law, all documents and business records related to tax filing must be properly kept at least7 years。
List of major tax deductible expenses
| Type of Expenditure | Specific examples and key notes |
|---|---|
| Staff Related Expenses | Employee salaries, bonuses, and allowances;Mandatory Provident Fund (MPF) Mandatory Contributions(subject to specific caps); severance or long service payments under the law. |
| Venue and Operating Costs | Office, warehouse and store rent; related water, electricity, business network and telephone charges; building management fees. |
| Business Direct Costs | Cost of goods purchased; direct costs of services rendered; raw materials and inventories. |
| Marketing & Entertainment | Advertising and marketing expenses;Catering fees for entertaining customers for business purposes(detailed records must be kept); business related travel (airfare, hotel). |
| Professional Service Fee | Auditing, accounting and bookkeeping services; legal fees related to business operations (e.g. debt collection). |
| Finance and Insurance | Interest on borrowings for the purpose of generating profits; insurance premiums for various types of business (e.g. labor insurance, fire insurance); bank charges. |
| Repair & Maintenance | Machinery, Equipment and Business PremisesRepair and maintenance fee(Note: Expenses of an improvement or upgrade nature are capitalized and treated differently). |
| Special Deductions | Recognized Charitable Donations(not less than $100, capped at 35% of assessable profits);Renovation of commercial premisesCapital expenditure (deductible in equal installments over 5 years). |
| Depreciation allowances on assets | Purchase of computer hardware and software, environmental protection equipment, etc.Specific assetsThe full amount is deductible in the year of purchase. Other equipment (e.g., furniture, machinery) is deductible.Initial Allowance(Cost 60%) and annual depreciation allowances. |
Common Non-Deductible Expense Traps
- Private or household expenses:Personal expenses of the proprietor, partner or his/her family members are absolutely prohibited.No, I can't.Blending into the company's accounts. For example, “salary” or “interest” paid to the sole proprietor himself or his spouse is not deductible.
- Capital expenditure:Expenditure on the purchase or improvement of long-lived assets (e.g. property, vehicles, major equipment) is generally not deductible in full directly and must be deducted through theDepreciation allowancesAmortization on a yearly basis.
- Corporate tax and penalties:Your paymentProfits tax is not deductible per seThe fines or penalties incurred as a result of an offense are also generally not deductible. Fines or penalties incurred as a result of an offense are generally not deductible.
- Non-business related expenses:Any expenditure that is not directly related to the production of taxable profits, such as internal parties of a purely employee welfare nature (where there is no record of a business purpose), will be difficult to deduct successfully.
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Frequently Asked Questions
Payable expenses are a common sample item of the Inland Revenue Department.A single receipt is not enough.You must keep internal records. You must keep an internal record of the date, the client company and name, and the specific business content of the negotiation to prove its business necessity.
Be sure to file your tax return on time. This is because operating losses can beIndefinite Carry ForwardThis is used to offset profits in future years. Losses are properly recorded in preparation for future tax savings.
Yes. Additional tax deduction for qualified R&D expenditure. For “Type B” qualified expenditure, the first $2 million is eligible for an additional tax deduction.Super Deduction for 300%In addition, subsequent expenses are also eligible for the 2001 TP3T deduction.
