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What business expenses can a self-employed person deduct in Israel?

A self-employed person (osek) in Israel may deduct expenses incurred wholly and exclusively in the production of business income, under Section 17 of the Income Tax Ordinance. Typical deductible costs include rent, professional services, business travel, and a recognized portion of vehicle, phone, and home-office expenses. Private and capital expenses are not deductible under Section 32, though capital assets can be depreciated over time. Keeping valid tax invoices and proper books is essential for expenses to be accepted.

Section 17 sets the general test: an expense is deductible if it was incurred wholly and exclusively in generating the taxable income for that year. Section 32 then blocks deductions for private living costs and for capital outlays, which instead qualify for depreciation spread over the useful life of the asset. Regulations fix recognized percentages for mixed private and business items, so only part of a car's running costs, a mobile phone, or a home office used for work may be claimed. To be accepted by the tax authority, expenses must be supported by valid tax invoices issued in the business name and recorded in a compliant bookkeeping system.

For a foreign national running a business or freelancing in Israel, the practical keys are registering correctly as an osek patur or osek murshe, issuing compliant invoices, and keeping private spending separate from business spending. A VAT-registered osek murshe can also reclaim input VAT on business purchases, which is a distinct mechanism from the income-tax deduction. Our guide to filing your annual income tax return in Israel shows where deductions are claimed on the return. Poor documentation is the single most common reason the Israel Tax Authority disallows a claimed expense during an audit.

⚖ In Practice
  • Governing law: Section 17 (deductions) and Section 32 (non-deductibles), Income Tax Ordinance [New Version]
  • Core test: the expense was incurred wholly and exclusively in producing business income
  • Recognized partial items: vehicle running costs, mobile phone, and home-office expenses at set percentages
  • Not deductible: private living costs and capital outlays (capital assets are depreciated instead)
  • Competent authority: Israel Tax Authority (Rashut HaMisim)
  • Documentation: valid tax invoices and bookkeeping are required; deductions are claimed on the annual return

From the full guide: Filing Your Annual Income Tax Return in Israel

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