The Israel Tax Authority has published an update regarding the reform for small businesses ("Tiny Business" / Esek Zair), following the Economic Efficiency Law (Legislative Amendments for Achieving Budget Goals for Budget Years 2023 and 2024), 5783-2023. This reform introduced a unique taxation model for small business owners, significantly easing their interaction with the Tax Authority. The new model grants a "normative expense rate" of 30% in lieu of actual expenses, alongside an exemption from filing an annual report and other bureaucratic reliefs.
‍
‍
‍Key Updates and Highlights

War Compensation, Reserve Duty, and Maternity Pay
Recently, the Finance Committee approved regulations determining that income from indirect damage compensation received by a small business owner will be included in their transaction turnover. Additionally, the Committee approved allowing small business owners with income from maternity pay or reserve duty pay to enjoy the exemption from filing an annual report, provided they meet the other conditions of the regulations.
‍

Guidelines for Reserve Duty and Maternity Pay:

• Direct Payment from National Insurance (Bituah Leumi): If payment was received directly from the National Insurance Institute, it must be reported in the tax coordination system (Teum Mas) and in the short report at year-end. Dedicated fields have been opened for this purpose.
• Tax Deduction at Source: If tax was deducted at source by National Insurance, the deduction must be included in the short report.
• Calculation of Ceiling: These incomes are not included in the calculation of the turnover ceiling for eligibility as a small business, and no 30% expense deduction can be claimed against them.
• Payment via Employer: If these incomes were received directly through an employer, do not include them in the tax coordination or short report to avoid double taxation.
  ‍

Guidelines for 2024 Short Report:

• Maternity and reserve duty pay must be included in the short report (deadline: Dec 31, 2025).
• If a regular annual report is filed, these incomes should be reported separately in the relevant field (250 or 270).
  ‍

Compensation for Indirect Damage (War Compensation):

• Inclusion in Turnover: War compensation received during the year must be included as part of the small business turnover.
• Reporting: The compensation must be included in the tax coordination and in the short/annual report.
• Exceeding the Ceiling: In 2024 and 2025, if the turnover together with war compensation exceeds the small business ceiling (NIS 120,000), a full annual report is required. However, the 30% normative expense deduction can still be claimed against the business income portion only.
  ‍

Regulations for 2024: Small business owners who received war compensation, reserve duty pay, or maternity pay in 2024 are entitled to submit the short report until December 31, 2025.
‍

Tax Coordination for Small Businesses

Deadline: Joining the "Small Business" model is conditional on performing tax coordination during 2025. No extensions can be granted beyond this date.
Urgency: It is recommended to perform tax coordination by December 25, 2025, to avoid glitches. Failure to complete tax coordination by the end of 2025 will result in the cancellation of the model registration, requiring the filing of full reports and payment of advances for 2025.
‍

Important Points for Exemption from Annual Report:

• Mandatory Coordination: Every small business owner, without exception, must perform tax coordination.
• Zero Turnover: Even if the expected turnover is NIS 0 in 2025, tax coordination must be performed (report income of NIS 1 to avoid error).
• Single Income Source: Even if the small business is the only source of income, tax coordination is required for the system to determine the applicable tax rate.
• Updating Data: If tax coordination was already performed without small business income, click "Update Data" and report the expected annual turnover to the assessing officer.
  ‍

Registration: If you or your clients have not yet registered for the reform, it is recommended to do so and perform tax coordination immediately to receive the exemption from filing an annual report for 2025.

‍