Which business expenses can I deduct, including costs of running the business from home?

An expense is deductible when it is incurred wholly and exclusively for the purposes of the business and the Ordinance does not specifically block it. That single test in section 20 of the Income Tax Ordinance, 2001 covers rent, salaries, utilities and most day-to-day costs. Personal spending is excluded, and costs that serve both home and business are split.

What does the law say?

The general rule. Section 20(1) allows a deduction, in computing income under the head Income from Business, for any expenditure incurred by the person in the year wholly and exclusively for the purposes of business. The Ordinance does not give a list of approved expenses. Any cost that meets the test qualifies unless another provision says otherwise.

Capital costs. Section 20(2) says that where the spending buys a depreciable asset, an intangible with a useful life of more than one year, or is pre-commencement expenditure, it must be depreciated or amortised rather than deducted at once.

Personal costs. Section 21(h) disallows “any personal expenditures incurred by the person”. Household food, family travel and school fees are personal, even when paid from the shop’s cash.

Mixed costs. Section 67(1)(b) covers expenditure that relates to income under a head of income “and to some other purpose”. It must be apportioned on any reasonable basis, taking account of the relative nature and size of the activities.

Mixed-use assets. Section 22(3) applies where a depreciable asset is used partly for the business and partly for another use. The depreciation deduction is restricted to the fair proportional part.

Is there a home-office rule?

No. The Ordinance contains no provision written for people who run a business from home. It does not set a fixed percentage, a per-room allowance or a floor-area formula. The general rules decide the matter: section 20 for the business part, section 21(h) for the personal part, and section 67 for splitting a cost between them. Section 67(2) lets the Board make rules on apportionment, but the Income Tax Rules held in this corpus contain no home-office method.

What kinds of expenses usually pass the section 20 test?

Expense	When it meets the section 20 test
Shop or workshop rent	Premises used for the business
Staff salaries	Staff working in the business, subject to the banking rule for salaries above Rs. 32,000 a month in section 21(m)
Electricity, gas, phone, internet	Business connection, or the business share of a shared connection
Stock and raw materials	Goods bought for resale or for making products
Transport and delivery	Business trips and deliveries
Customer entertainment	Only within rule 10 of the Income Tax Rules, 2002, read with section 21(d)

Every item in this table is still subject to section 21. That section blocks, among other things, certain cash payments and expenses where required tax was not withheld. Those rules are on separate pages.

Worked example (illustrative figures)

Rukhsana runs a tailoring business from her rented house in Multan. One of the four rooms is used only as the workroom. Her made-up yearly figures:

Cost	Total paid
House rent	Rs. 480,000
Electricity	Rs. 180,000
Thread, cloth and trimmings	Rs. 350,000
Salary of one helper	Rs. 240,000

The Ordinance does not fix a method. For illustration, suppose she treats one room out of four as a reasonable basis for rent, and half of the electricity because the sewing machines draw most of it.

1. Rent, business share: Rs. 480,000 x 1/4 = Rs. 120,000.
2. Electricity, business share: Rs. 180,000 x 1/2 = Rs. 90,000.
3. Materials, used wholly for the business: Rs. 350,000.
4. Helper’s salary, wholly for the business: Rs. 240,000.
5. Total claimed: Rs. 120,000 + Rs. 90,000 + Rs. 350,000 + Rs. 240,000 = Rs. 800,000.

The remaining Rs. 360,000 of rent and Rs. 90,000 of electricity are personal under section 21(h). Whether her bases are reasonable is a question of fact under section 67. The law does not answer it in advance.

What if …?

What if I use my car for both business and family? The car is a depreciable asset, so section 22(3) restricts depreciation to the fair proportional part for business use. Running costs such as fuel are mixed expenditure under section 67.

What if a room is used for business in the day and by the family at night? That is a mixed use. Section 67 requires a reasonable basis, taking account of the nature and size of each activity. The Ordinance does not set one.

What if I buy a sewing machine? Section 20(2) sends the cost through depreciation over several years, not a single deduction.

Common mistakes

• Claiming the whole house rent. Only the business share meets section 20. The rest is personal under section 21(h).
• Assuming there is a fixed home-office percentage. The Ordinance does not provide one.
• Deducting equipment in full in the year of purchase. Section 20(2) requires depreciation.
• Treating every lunch with a supplier as deductible. Rule 10 limits entertainment to listed situations and to persons directly related to the business.

What to check in the official text

Read section 20, then every clause of section 21 against each expense you claim. For mixed costs, read section 67 and section 22(3). For entertainment, read rule 10 of the Income Tax Rules, 2002. Keep in mind that section 21(p) allows limits on utility bills to be prescribed; the Rules held here, amended to 24 November 2023, do not set such a limit, and any later rule is outside this corpus.