On video: Demonstrations against the legal revolution in Bnei Brak (Photo: Reuven Castro)
Did you donate to our protest?
You may be able to demand a refund, but there is also a "but"... (Photo: Uri Sela)
These days we are witnessing a constitutional crisis and widespread protests against the legislative actions of the Israeli government, we will not refer here to the question of who is right and who is wrong, but will only mention an important fact regarding the test of registering a contribution to a protest as a recognized expense: in the opinion of countless experts from Israel and the world, the government's legislative act, will severely damage Israel's economy and deteriorate the state of the economy in a substantial way.
Those who want to see signs in the field can already point to some worrying directions.
For example: a decrease in the exchange rate of the shekel in relation to foreign currencies, an outflow of funds and businesses from Israel and a sharp decrease in tax collection from the beginning of 2023. According to experts, the legislation may also harm the state's security, according to the statement of Defense Minister Yoav Galant, in medicine and in many other areas.
In other words, a business owner can claim that, based on the above, it is reasonable to assume that the continuation of the legislation will lead to severe damage to many businesses in the economy.
Again, this is not a value reference, but, as will be explained below, an attempt to understand whether it is possible to register an expense in support of a protest against the legal reform-revolution as a recognized expense for tax purposes.
Allowance of expenditure for tax purposes
Pursuant to Section 17 of the Income Tax Ordinance, an expense incurred entirely in the production of income will be recognized as a deduction from a person's taxable income.
That is, the expense will reduce the person's income and correspondingly reduce his taxable income for tax purposes.
In summary, in order to determine whether an expense will be recognized for tax purposes, the courts established a series of tests, including the test of business expense versus private expense and the test of capital expense versus productive expense.
Regarding the first test, it was determined by the courts and section 32(1) of the Income Tax Ordinance, that if the expense is integrated into the income generating activity and the natural structure of the business and its management, then it will be possible to recognize it for tax purposes.
Regarding the second test, it was determined that if the purpose of the expenditure is to preserve the existing, then, an expenditure intended to preserve the production mechanism of the business in a proper condition that generates income and does not create a new source of income, it will also be recognized as a deduction.
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Likewise, if the tax authority refuses to recognize the expense, this will be revealed in a hearing and not in the framework of a criminal proceeding (Photo: Flash 90, Olivier Fitoussi)
Against the background of the aforementioned, it can be argued that the transfer of funds in order to try and prevent the collapse of the Israeli economy and as a result of this to prevent the collapse of the business, falls within the tests outlined in the ruling for the needs of recognizing the expense for tax purposes.
Therefore, the transfer of these funds can be seen as a payment that is integrated into the business's activity, as an expense whose purpose is to prevent damage to the business's income generation mechanism, and above all as payments whose purpose is to maintain the existing one.
the conclusion
As long as the transfer of funds to an institution or organization (whether recognized or not) was done entirely for the purpose of fighting against the legislation, by a business, there is no principled obstacle to recognizing this payment as an expense and deducting it from the taxable income of the business.
CPA Dolev Hasid (Photo: Yehats)
CPA attorney Maury Ampali (photo: Public Relations)
In accordance with the income tax rules and bookkeeping instructions, in order to prove an expense, an official document (such as a "receipt for a donation" or a "tax invoice") is not necessary and it is sufficient to present sufficient references for the transfer itself and its purpose.
in practice
Company owners and self-employed persons may claim the expenses paid to organizations as business expenses, according to the references on the transfer of funds (or receipts, if any). Employees can submit an annual report to the income tax at the end of the year, in which they will deduct these expenses from the salary.
Let's recall, in this regard, that the absolute majority of the protest organizations are recently established organizations or organizations that do not have a donation certificate in accordance with Section 46 of the Income Tax Ordinance and therefore cannot receive a tax credit for donating to them.
clarification
There is a disclosure that the assessor, if he examines the file, will try to claim that the expense is not recognized as a deduction.
There is also a risk that the authorities will try to claim that the deduction requirement itself constitutes a criminal offense.
At the same time, as long as proper disclosure is given as part of the report, the risk is very low in our estimation.
We emphasize that in any case, the assessor cannot change or reject the report submitted by the taxpayer, without a discussion, including the option of the taxpayer to submit a request and appeal to the court and appeal their decision, if necessary.
It is desirable that those who transfer substantial sums consider receiving an official opinion, thereby removing the criminal exposure and arriving more prepared for the discussion with the assessor, as soon as it is prepared.
The above does not constitute an opinion.
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