How Can You Reduce Your Tax Burden and Save Money for Your Business?

Running a business involves expenses — but not every payment you make is treated the same way for tax purposes.

For an Osek Murshe (VAT-registered self-employed business), business expenses can potentially provide two different tax benefits:

First, an eligible expense may reduce your taxable business profit for Income Tax purposes.

Second, where VAT was charged, you may also be able to deduct the input VAT (Mas Tsumot) from the VAT you collect from customers.

Understanding the difference is important because an expense may be deductible for Income Tax but have no deductible VAT, or only part of the VAT may be recoverable.

Under Section 17 of the Israeli Income Tax Ordinance, the general principle is that expenses incurred in producing business income may be deductible, subject to the specific rules and limitations that apply to different types of expenditure. Government of Israel

Osek Murshe vs. Osek Patur: What Is the Difference for Expenses?

For Income Tax, the basic rules governing deductible business expenses are generally the same whether you are an Osek Patur or an Osek Murshe.

The major difference is VAT.

An Osek Patur does not charge VAT to customers and also cannot deduct input VAT.

An Osek Murshe normally charges VAT on taxable sales and may deduct VAT paid on qualifying business purchases and expenses, subject to the VAT rules. The Tax Authority’s VAT guidance specifically covers the right of registered businesses to deduct input VAT. You can read more here: Government of Israel

A simple example

Suppose an Osek Murshe purchases business equipment for:

₪1,000 + ₪180 VAT

If the VAT is fully deductible:

• ₪180 may be claimed as input VAT
• ₪1,000 becomes the relevant cost for Income Tax purposes
• If the item is a capital asset, the ₪1,000 may be deducted over time through depreciation rather than immediately

The same purchase for an Osek Patur would generally include the unrecovered VAT as part of the cost.

Common Deductible Expenses for an Osek Murshe

Vehicle Expenses: One of the Most Common Areas of Confusion

Vehicle expenses have different rules for Income Tax and VAT.

For Income Tax purposes, the general rule for a self-employed person using a standard private vehicle is the higher of:

45% of qualifying vehicle expenses, or
vehicle expenses less the statutory imputed-use amount.

The Tax Authority’s guidance confirms the 45% mechanism. Government of Israel

Vehicle expenses can include items such as fuel, insurance, repairs, maintenance, licensing, tolls, certain parking expenses and depreciation.

What about VAT on a private car?

VAT on the purchase of a private vehicle is generally not deductible, except for specific businesses and vehicles covered by exceptions.

For ongoing expenses where the vehicle has both business and private use, the VAT rules are different. Where the precise business/private allocation cannot be established, the VAT Regulations generally allow:

Two-thirds of the input VAT where the principal use is business, or
One-quarter of the input VAT where the principal use is non-business/private. 

This is why saying simply “car expenses are 45% deductible” is incomplete: the 45% rule concerns Income Tax, while VAT requires a separate calculation.

Meals, Refreshments and Hospitality

Not every restaurant bill becomes a business expense just because you discussed business over lunch.

Personal meals are generally not deductible simply because the business owner was working at the time.

However, specific rules apply to items such as light refreshments at the business premises, business hospitality and certain expenses involving customers or overseas guests.

For Income Tax, qualifying light refreshments at the place of business are generally subject to a partial deduction rather than being automatically deductible in full.

These expenses should therefore be reviewed according to their exact nature rather than entered automatically as “100% business expense.”

Business Gifts

Gifts to customers, suppliers and other business contacts may be deductible where there is a genuine business connection and proper records are maintained.

For 2026, the deductible ceiling for qualifying gifts to a person in Israel is ₪240 per recipient per year.

Businesses should keep a record of:

• recipient
• business relationship
• reason for the gift
• amount
• supporting invoice

Employee gifts follow different payroll and benefit rules.

Business Travel Abroad

Travel abroad can be deductible where the trip has a genuine business purpose.

Potential expenses include:

• airfare
• accommodation
• local transportation
• conference fees
• business-related vehicle rental
• certain meal/per-diem costs

However, overseas travel is subject to specific limits and documentation requirements.

Where a trip combines business and private travel, the private element should not simply be deducted as a business expense.

Keep evidence showing the business purpose of the trip, such as meeting schedules, conference registrations, correspondence and invoices.

Clothing: Usually Not Deductible

Ordinary clothing is normally considered a private expense, even if you wear it only when meeting clients.

However, specialized professional clothing or protective equipment may qualify where it is clearly required for the business and is not ordinary everyday clothing.

Examples may include:

• protective workwear
• safety equipment
• certain uniforms
• specialized professional garments

A suit purchased for client meetings is not treated the same way as protective clothing purchased for industrial work.

Capital Purchases: Not Everything Is Deducted Immediately

Buying a laptop, machine, dental chair, professional camera or expensive piece of equipment does not necessarily mean the full cost is deducted in the year of purchase.

Where an item is a capital asset expected to serve the business over several years, the expense will generally be recognized through depreciation according to the applicable tax rules.

Typical examples include:

• computers
• vehicles
• furniture
• machinery
• medical equipment
• professional equipment
• certain website-development costs
• renovations and improvements

The input VAT, however, may potentially be deductible earlier where the VAT conditions are satisfied.

What About VAT When an Expense Is Partly Private?

This is especially relevant to an Osek Murshe.

If a purchase or service is used partly for the business and partly privately, you generally cannot automatically claim all of the VAT.

Where an exact allocation cannot be determined, Regulation 18 of the VAT Regulations provides default rules under which two-thirds may generally be deducted when the predominant use is business and one-quarter where the predominant use is not business.

Examples can include:

• mobile phones
• home internet
• certain vehicle expenses
• equipment with mixed private and business use

Expenses That Do Not Include VAT

A common mistake is assuming every expense should create an input-VAT deduction.

Many legitimate business expenses contain no VAT to deduct.

Examples include:

• salaries
• employer National Insurance
• Arnona
• many insurance premiums
• many bank charges
• interest
• certain government fees

These expenses may still be deductible for Income Tax, even though there is no input VAT.

Expenses That Are Generally Not Deductible

Some payments should not be treated as ordinary business expenses, including:

• private household expenses unrelated to the business
• personal vacations
• ordinary personal clothing
• private groceries
• personal entertainment
• fines and penalties, subject to the relevant law
• Income Tax payments themselves
• private loan repayments
• the capital portion of a business loan repayment

The fact that something was paid from a business bank account does not make it a deductible expense.

The test is the nature and purpose of the expense.

Pension and Keren Hishtalmut for a Self-Employed Person

Deposits made by a self-employed person to pension plans and a Keren Hishtalmut can provide significant tax benefits.

However, they are not treated in exactly the same way as normal operating expenses such as rent or advertising.

They receive deductions, credits or exemptions under specific tax provisions and annual limits. Self-employed individuals may be entitled to tax benefits for contributions to a Keren Hishtalmut. go.gov.il

Can an Osek Murshe Also Be an Esek Zair?

Yes.

This is an important point that many business owners misunderstand.

Osek Murshe is a VAT classification.

Baal Esek Zair is an Income Tax regime.

An Osek Murshe may therefore qualify as an Esek Zair for Income Tax purposes if the applicable conditions are satisfied.

For 2026, the annual turnover threshold is ₪122,833. Eligible businesses using the Esek Zair regime can generally claim a standardized expense deduction of 30% of turnover instead of deducting individual actual expenses for Income Tax purposes.

The VAT status does not disappear: an Osek Murshe still deals with VAT according to the VAT rules.

What Documents Should an Osek Murshe Keep?

To claim expenses correctly, keep proper documentation.

For VAT purposes in particular, a payment receipt alone is not necessarily enough to deduct input VAT. The business generally needs the appropriate tax invoice and the expense must relate to taxable business activity.

The invoice should be issued correctly to the business and include the required details.

Also note that Israel’s Invoice Allocation Number regime now affects the ability to deduct input VAT on larger invoices. As of 1 June 2026, the allocation-number requirement applies to invoices exceeding ₪5,000 before VAT, subject to the applicable rules. 

Good practice is to retain:

• tax invoices
• receipts
• bank / credit-card evidence
• contracts
• business-purpose documentation
• travel records
• gift-recipient lists
• asset purchase details
• vehicle information

The Most Important Rule: Business Purpose Comes First

There is no magic list where every expense is automatically deductible.

The starting point is always:

Was the expense genuinely incurred for the purpose of producing business income?

Then you need to ask:

Is it a current expense or a capital asset?
Is there any private element?
Are special Income Tax restrictions applicable?
Does the invoice contain deductible VAT?
Can all, part or none of that VAT be claimed?

Two businesses can purchase exactly the same item and receive different tax treatment because the business purpose and use are different.

Need Help With Your Business Expenses?

Proper expense reporting can reduce unnecessary tax while keeping your business compliant with the Israeli Tax Authority.

At ADT CPAs & Consultants, we assist self-employed businesses with:

• bookkeeping
• VAT reporting
• Income Tax
• payroll
• annual tax returns
• expense classification
• tax planning
• ongoing accounting support

Not sure whether an expense is deductible or whether the VAT can be claimed?

Contact ADT CPAs & Consultants and we will help you report it correctly.

Phone / WhatsApp: 054-987-8867