10. If not every expense/outgoing is deductible from the assessable profits, which ones are deductible?

10. If not every expense/outgoing is deductible from the assessable profits, which ones are deductible?

General Rule

Business expenses related to your day-to-day operations are normally deductible as your operating expenses to the extent which they are incurred during the basis period for that year of assessment in the production of profits chargeable to Profits Tax, such as: 

• rents paid on business premises/quarters for employees;
• light, water and telephone charges for business premises;
• salaries, wages, allowances, bonuses for the hiring of employees;
• employer's mandatory and voluntary contributions to MPF schemes or MPF-exempted Recognized Occupational Retirement Schemes (but the deduction is limited to 15% of the total emoluments of the employee for the period to which the payments relate);
• MPF mandatory contributions as a self-employed person for the sole proprietor or partner, currently not exceeding $18,000 per year per person for the year of assessment;
• severance or long service payments paid at the termination of employment;
• interest on funds borrowed for normal business operations, such as for the purchase of stock (but must satisfy the conditions laid down in section 16(2) of the Inland Revenue Ordinance;
• bad or doubtful debts (i.e., sales duly recognized as your turnover but for which you cannot collect payments from customers);
• costs of repairing articles, premises, machinery and plant used in producing profits;
• approved charitable donations of not less than $100, but not exceeding 35% of your assessable profits.
• costs of replacing implements and utensils used in producing profits (no depreciation allowance would be allowed in respect of the same items); 
• expenditures on the purchase of patent rights or rights to any know-how, or specified intellectual property rights for use in the production of chargeable profits (However, the relevant patent rights or rights to any know-how must not be purchased from an associated or related person);
• expenditures on research and development (R&D) including market, management and business research, design-related expenses and payments for technical education subject to certain rules. With effect from the year of assessment 2018/19, for qualifying expenditure incurred on certain domestic R&D, the first $2 million is eligible for a 300% tax deduction and the amount beyond $2 million is eligible for a 200% deduction; and

There are also some other allowable deductions by way of tax incentives which include but not limited to: 

• registration costs of a trademark, design or patent for use by the business;
• capital expenditures on environmental protection facilities;
• payments for technical education subject to certain rules;
• 100% write-off of cost in the year of purchase of a “prescribed fixed asset”, which includes: machinery or plant used specially and directly in any manufacturing process, computer hardware (other than that which is an integral part of any machinery or plant), and computer software and computer systems, but does not include any leased item or item acquired under hire-purchase terms;
• capital expenditures incurred on the renovation or refurbishment of buildings by 5 equal deductions over 5 successive years of assessment;
• industrial building allowance; and
• rebuilding allowance for commercial buildings.