Deductible and Non-Deductible Expenses under the Income Tax and VAT Law in El Salvador

Understanding which expenses are deductible and non-deductible is fundamental for the correct tax compliance of companies and individuals in El Salvador.
Both the Income Tax Law (ISR) and the Value Added Tax Law (VAT) establish clear parameters that allow differentiating between expenses that reduce the taxable base and those that do not generate tax benefits.

Deductions under the Income Tax Law (Ley del Impuesto sobre la Renta - ISR)

The Income Tax Law establishes that expenses must be necessary and proper to the business in order to be considered deductible.
The main expenses include:

• Business expenses: advertising, electricity, telephone, stationery, among others.

• Remuneration: salaries, wages, per diems, Christmas bonuses and other compensation for services rendered.

• Business travel: airfare, lodging and meals strictly related to business activities.

• Leases: rental of offices, warehouses, factories or machinery used directly in the production of income.

• Insurance premiums: related to risks of the company's assets.

• Taxes and contributions: municipal taxes and fees levied on the income-producing source.

• Fuel, maintenance and interest related to the operation of the company.

• Production and sales costs, duly recorded.

Expenses Not Deductible for Income Tax Purposes

Article 29-A of the Income Tax Law clearly establishes the expenses that may not be deducted, such as:

• • Personal and living expenses of the taxpayer or his family.

  • Remuneration for services unrelated to the production of computable income.

  • Travel not directly related to the business.

  • Acquisition of vehicles, fuel or real estate not related to the generation of income.

  • Fines, surcharges and late payment interest.

  • Dividends paid to partners or shareholders.

  • Expenses that are not properly documented and recorded in the accounts.

Deductions according to the Value Added Tax Law (VAT)

In the case of VAT, Article 64 establishes that the tax payable is determined by deducting from the tax debit the tax credit generated in the acquisition of goods and services used in the line of business.
In order to be deductible, requirements must be met, such as:

• Acquisitions of movable property intended for realizable assets or fixed assets.

• Contracted services that are indispensable for the line of business.

• General expenses related to the operation, such as freight, energy, water and telephone.

• Adequate documentation by means of original tax credit vouchers.

• Accounting records in purchase books and inventory control.

Non-Deductible VAT Tax Credits

Article 65-A of the VAT Law determines the tax credits that are not deductible, among them:

• Acquisition of food and groceries, unless it is the line of business.

• Purchase, lease or repair of vehicles not essential to the business.

• Air tickets not strictly related to the commercial line of business.

• Goods or services destined for personal or private purposes of partners, shareholders or employees.

• Purchases of alcoholic beverages, cigarettes, jewelry or clothing (outside the line of business).

• Tax credits on invalid documents or issued by unregistered taxpayers.

Conclusion

Differentiating between deductible and non-deductible expenses is key to optimizing the tax burden and avoiding tax penalties.
Both the Income Tax Law and the VAT Law impose strict rules, so it is advisable to keep orderly accounting records supported by valid documentation.