9. If not every expense/outgoing is deductible from the assessable profits, which ones are deductible?
Business expenses related to your day to day operations are normally deductible as your operating expenses, 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, not exceeding $18,000 per year per person for the year of assessment 2015/16 and onwards;
- 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; and
- approved charitable donations of not less than $100, but not exceeding 35% of your assessable profits.
There are also some allowable deductions by way of tax incentives which include:
- registration costs of a trademark, design or patent for use by the business;
- expenditures on the purchase of patent rights or rights to any know-how for use in Hong Kong in the production of assessable profits (However, the relevant patent rights or rights to any know-how must not be purchased from an associated or related person. ) ;
- expenditures for scientific research including: any systematic, investigative or experimental activities for the purpose of any feasibility study in relation to any market, business or management research; and the costs of machinery and plant for such purposes;
- 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;
- rebuilding allowance for commercial buildings.
Expenditure on Building Refurbishment
A person who incurs capital expenditure on the renovation or refurbishment of business premises (including hotels and guesthouses) is allowed to deduct that expenditure over a period of 5 years in equal installments commencing in the year in which the expenditure is made.