Deductible expenses for freelancers in Israel
Not every expense connected to your business is deductible in full. The Israel Tax Authority (Rashut HaMisim) sets fixed deduction percentages for a number of common categories, meant to reflect the business share of an expense that also has a personal-use component.
Two kinds of recognition, easily confused
Before the categories, it helps to separate two terms that sound alike. Income tax recognition reduces your taxable income, so it saves tax at your marginal bracket rate. Input VAT deduction actually refunds the VAT you paid on the expense.
One expense can be recognized at one rate for income tax and a different rate for VAT. The clearest case is a car, where the input VAT rate differs from the income tax rate. The deductible expenses calculator works out the income tax side, and the VAT deduction rules are in the input VAT guide.
Car expenses
Car expenses (fuel, insurance, servicing, rental or leasing) are deductible for most freelancers only in part, on the assumption that the car also serves personal use. The exact rate depends on the type of vehicle and how it's used, but for a freelancer without a dedicated work vehicle it usually works out to around 45% of the total expense.
What counts as a work-only vehicle
A vehicle used purely for the business, unavailable for personal use, sits in a different category entirely. In practice that classification is rare among freelancers, and it needs real evidence, such as a commercial vehicle that stays at the business overnight. Driving your own car to meetings does not make it a work vehicle, and assuming otherwise is how audits go badly.
What is worth documenting
A business mileage log, even where the fixed rate makes it unnecessary, makes the conversation with your accountant and with an auditor far easier. It also tells you whether the car is worth putting in the books at all.
The full detail, including the difference between the income tax calculation and the VAT deduction, leasing and commercial vehicles, is in the vehicle expenses guide. Anyone doing delivery work will find the complete picture in the couriers and delivery drivers guide.
Phone and internet
Mobile phone and internet expenses are deductible at a relatively high rate, around 80%, on the assumption that most of the usage on these lines is business-related for a freelancer. If you keep a line used solely for the business, ask your accountant whether a higher rate applies.
Home office
If you work from home, you can deduct a proportional share of your apartment expenses (rent, municipal tax/arnona, electricity, building committee fees) based on the ratio between the area of the room used as an office and the total apartment area.
Working out the ratio
A 100 sqm apartment with a 12 sqm office room gives a ratio of 12%. That same 12% applies to each apartment expense separately. Keep the calculation consistent through the year rather than adjusting it month to month.
Claiming a home office deduction requires proper documentation of that proportional area, and it's worth checking with an accountant on how "a dedicated room" is defined versus a work corner in the living room. That distinction is exactly what gets examined in an audit.
What goes into the ratio and what does not, and what changes in a flat you own rather than rent, is set out in the home office expenses guide.
Equipment and software
Computer equipment, office furniture, software subscriptions and cloud services directly tied to your work are generally deductible in full, provided you keep a valid invoice made out to the business.
Expensive equipment carries one more wrinkle. A significant purchase isn't always booked as a current-year expense, and may instead be depreciated over several years under the depreciation regulations. A laptop usually goes through as a current expense; anything substantially larger is worth checking with your accountant.
Refreshments, travel and accommodation
Office refreshments are only partly deductible, and client entertainment is restricted by separate rules. Overseas travel for business is deductible subject to ceilings and documentation, and requires a clear split between the business and personal parts of the trip. These are the categories where the intuitive assumption ("it was a business meeting") is almost always broader than what the law recognizes.
Input VAT, only for licensed dealers
Input VAT deduction applies only to a licensed dealer (osek murshe). An exempt dealer neither charges VAT nor deducts it, so an expense is recorded at its full amount, VAT included, for income tax purposes alone.
For a licensed dealer, the VAT deducted on expenses lands on the input side of the periodic VAT report and reduces the payment. In a month with a large equipment purchase, that's what can turn the report into a refund instead of a payment.
The conditions for deducting, the six-month window and the mixed-input rules are set out in the input VAT guide.
Expenses above the threshold and the allocation number
Since the allocation number threshold came down, the expense side is affected too. An invoice from a supplier above the threshold with no allocation number on it does not entitle you to an input VAT deduction. It's worth putting a standing check on incoming invoices before you close the report.
What you shouldn't do
Recording a purely personal expense as a business expense (private purchases with no connection to the business, for example) isn't a gray area. It's a false report that exposes you to penalties in an audit. The deduction percentages set by law also aren't something you can adjust unilaterally based on your own judgment.
There's a less dramatic but expensive mistake too: throwing away small receipts. An undocumented expense is an expense that doesn't exist, and receipts of ILS 40 and ILS 60 add up to a real figure over a year. They fall under the same retention duty as every other fiscal document.
Two areas have their own guide because the calculation differs: a home office, measured by floor area, and courier and rider expenses, where the vehicle is the tool of the trade.
How Slate calculates the deduction percentages
When you enter an expense in Slate, the deduction percentage for its category is shown and calculated automatically, and it's locked in permanently on that expense, so a later update to the category doesn't retroactively change expenses already recorded. Receipt scanning via AI fills in a draft expense with a suggested category, which stays there for your review before you save it.
This is general information, not tax advice. For a specific situation, talk to an accountant or tax adviser.
Common questions
What counts as a deductible expense?
An expense incurred in producing the business's income, and only the business share of it. A mixed expense serving both home and business is recognized at the percentage set for that category or by actual use.
How much of vehicle costs is deductible?
For a private car in mixed use, 45% of running costs are deductible for income tax. VAT is a separate calculation: two thirds of the input VAT on running costs where the main use is business, a quarter where it is not, and nothing at all on buying the car itself. A genuinely operational vehicle that never leaves the business is a rare case with different rules.
How much of phone and internet is recognized?
Up to 80% where the line serves both the business and the home. A line used solely for the business is fully recognized, but it has to be genuinely dedicated.
Does a deductible expense refund the whole amount?
No. It reduces taxable income, so the real saving is the expense times your marginal tax rate. In the 20% bracket, an ILS 1,000 expense saves about ILS 200.
Can an osek patur deduct expenses?
Yes, for income tax. They cannot reclaim input VAT, but expenses still reduce taxable income, so recording them and keeping receipts matters.
What if there is no receipt for the expense?
Without supporting documentation the expense is not recognized. A bank statement is not enough, because it shows a payment and not what was bought. You can ask the supplier for a copy, though after a year that gets hard.