10 Gray-Area Expenses for Sole Proprietors: How the Tax Office Judges

Q: What is the criterion for whether something is an expense?

The criterion is whether it is an expenditure needed to earn business revenue. Items shared with private use (rent, communication costs, cars, etc.) are prorated for personal/business use by the share used for business, and it is important to be able to explain and record the basis for the share.

This is an English translation of our Japanese article. Rules and figures may change; the Japanese version and official sources are authoritative.

Last updated: June 14, 2026. This article was prepared after checking materials published by the National Tax Agency (as of June 2026) (sources are noted in the text and at the end). It is general information, not tax advice.

Communications / IT

Mobile phone, internet line, subscriptions.

Apportionment needed

Car / transport

Gasoline, parking, vehicle inspection, car insurance.

Apportionment needed

Rent / utilities

Rent, electricity, and water for working from home.

Apportionment needed

Meals / entertainment

Dining with clients, solo meals, gift costs.

OK with conditions

Books / seminars / qualifications

The dividing line is whether it is study related to your current business.

OK with conditions

Clothing / suit costs

Why a suit bought for work does not become an expense.

Generally NG

Health checkups / medical costs

Your own medical costs are not an expense — use the medical expense deduction.

Generally NG

Travel / business trips

Tacking work on as an "add-on" to a mainly sightseeing trip does not pass.

OK with conditions

Computers / appliances

Apportionment of home-shared items and the small-amount depreciation special provision.

Apportionment needed

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Salary to family

A pitfall where blue-return status makes a world of difference.

OK with conditions

Why "gray areas" arise

Under the Income Tax Act, necessary expenses of business income are defined as "costs directly needed to carry on the business" (Income Tax Act, Article 37). The problem is how to treat expenditures that mix private and business use (household-related expenses)[National Tax Agency No.2210 (in Japanese)].

Judgment	Meaning	What to do
Fully OK	Dedicated to business, almost no private use	The full amount can be booked as an expense
Apportionment needed	Business and private use are mixed	Only the business-use share is booked as an expense
OK with conditions	Proof of business purpose is required	Can be booked if evidence and records exist
Generally NG	No connection to the business is recognized	Booking it risks disallowance

What is questioned most in a tax audit

The benchmark is the question, "Could the business have been carried on without that expenditure?" More than just receipts and invoices, records of "with whom, for what purpose, and how much you spent" are the strongest weapon to support the legitimacy of an expense.

10 gray-area expenses

Mobile phone and internet line costs

Apportionment needed

Cases where it can be an expense

The share of calls, email, and cloud-service use for business. If you contract a business-only SIM or line separately, it is fully OK.

Cases where it cannot be an expense

The share used for private calls, social media, video watching, and games. A family member's share on a shared family plan is also not allowed.

Audit points

A common rule of thumb for the business share is 60–80%. If you claim "almost no private use," a dedicated device or dedicated SIM is recommended. Subscriptions (Adobe, Slack, etc.) are fully OK if used for business only.

Gasoline, parking, vehicle inspection, car insurance

Apportionment needed

Cases where it can be an expense

The distance driven for business purposes such as meetings, deliveries, interviews, and site visits. A business-only vehicle (almost no private use) is fully OK.

Cases where it cannot be an expense

Private use such as everyday shopping, family drives, and commuting (a sole proprietor is not allowed commuting expenses).

Audit points

A mileage log (date, destination, distance driven) is the strongest evidence. A dashcam or GPS app history is also useful. Apportion using "business mileage ÷ total mileage."

Home rent, electricity, water (working from home)

Apportionment needed (personal/business proration)

Cases where it can be an expense

The share of rent and electricity equal to the area of the business-only space ÷ total floor area. When there is a clearly identified room used as a home-cum-office.

Cases where it cannot be an expense

The share for the living room or private spaces, most of the water bill (weak connection to the business), and food and daily-necessity costs.

Audit points

Apportionment by "hours of use" is also accepted, but area-based apportionment is simpler and easier to justify as reasonable. A common apportionment rate is around 20–40%. For real estate you own, depreciation and fixed asset tax — not rent — are the targets.

Meal costs, entertainment expenses, gift costs

OK with conditions

Cases where it can be an expense

Meetings and meals with clients and customers (record the other party's name and business purpose on the receipt). Business gifts and year-end presents.

Cases where it cannot be an expense

Purely personal meals with friends or family. Eating out alone (in principle it cannot even be booked as a "meeting cost"). Food and alcohol costs at home.

Audit points

Simply noting "meeting with Mr./Ms. △△ of ○○ Corp." on the back of the receipt makes it evidence. Even when booking a solo meal as "meal cost at a meeting venue," a record of the actual business substance is needed.

Book costs, seminar fees, qualification costs

OK with conditions (relevance is key)

Cases where it can be an expense

Books, courses, and seminar fees directly tied to maintaining or improving your current business. A design-tool course for a web designer, a book on writing technique for a writer, etc.

Cases where it cannot be an expense

Books or qualification costs for a hobby unrelated to the business. The cost of a qualification obtained before opening your business. Study costs to switch to a completely different occupation.

Audit points

The requirement is "improving the ability for the business you are currently running." A qualification obtained for a new business (e.g., an engineer obtaining a tax accountant qualification) is in principle not allowed. English-study costs are also more easily accepted if there is a "real situation of using English in your work."

Suits, business clothes, accessories

Generally NG

Cases where it can be an expense

Work clothes, uniforms, stage costumes, cosplay costumes, and other items that are business-only and cannot be worn in daily life. Uniforms bearing the company name, and the like.

Cases where it cannot be an expense

Suits, business casual, watches, bags, and accessories that can also be worn day to day. "I bought it for work" alone is not enough.

Audit points

The National Tax Agency's view is that "clothing that can be worn day to day under social convention is a household expense." The test is "can that clothing also be worn in private life?" Booking high-priced brand goods as an expense carries an especially high risk of disallowance.

Health checkup costs, medical costs, gym fees

Your own share is generally NG (use the medical expense deduction)

Cases where it can be an expense

If you employ workers, checkup costs for employees (welfare expenses). Treatment costs for work-caused injuries or illness (business-caused).

Cases where it cannot be an expense

The sole proprietor's own medical costs, health checkups, full medical checkups, dental treatment, gym, supplements, and massage. "Necessary for work because it's health management" does not pass.

Audit points

The right answer is to handle your own medical costs via the "medical expense deduction" (tax return). Medical costs exceeding ¥100,000 a year (or more than 5% of income) are deductible. Gym and supplements are in principle also not eligible for the medical expense deduction.

Travel costs, business-trip costs, inspection-visit costs

OK with conditions (the full amount changes depending on whether the purpose is business or sightseeing)

Cases where it can be an expense

Travel and lodging costs where business is the main purpose, such as visiting clients, inspecting exhibitions, reporting trips, and shooting on location. If most of the itinerary is business, the whole can be an expense.

Cases where it cannot be an expense

A mainly sightseeing or resort trip with work added as an "add-on." A family trip into which you slotted one work item.

Audit points

Record the actual business substance with an itinerary, meeting records, exhibition passes, and photos. When business and sightseeing are mixed, it is safest to apportion and book only the business share. A family member's share is fully self-funded unless there is a business connection.

Computers, tablets, appliances (shared with the home)

Apportionment needed (¥100,000 or more is depreciated)

Cases where it can be an expense

The amount corresponding to the business-use share. A blue-return filer can expense the full amount immediately for items under ¥300,000 under the special provision for small-amount depreciable assets (the business-use share)[National Tax Agency No.2100 (in Japanese)].

Cases where it cannot be an expense

A TV, refrigerator, or washing machine used mainly by the family. A private game console or hobby camera (no business substance).

Audit points

¥100,000 or more is in principle depreciated (a computer has a statutory useful life of 4 years). The blue-return small-amount depreciation special provision has a cap of ¥3 million per year in total. Set the business-use share at a reasonable rate that matches the actual situation.

‍‍Salary to family (spouse, children)

OK with conditions if blue return; white return has a cap

Cases where it can be an expense

Salary to a family member who actually works in the business, where a blue-return filer has submitted the "Notification of salary for full-time blue business employees" to the tax office in advance. The amount must be "a reasonable amount as consideration for labor."

Cases where it cannot be an expense

Salary to a family member without the notification. Payment with no substance (in name only). A white-return filer gets not a salary but a "full-time business employee deduction" (capped at ¥860,000 for a spouse and ¥500,000 for others).

Audit points

The deadline to submit the notification is the earlier of "within 2 months of the opening date" or "March 15 of that year." If the salary amount is too high, it may be disallowed as "unreasonably high," so it is important to set an amount that matches the work content and hours[National Tax Agency No.2075 (in Japanese)].

Summary: 3 principles to keep in mind when booking expenses

#	Principle	Concrete action
1	Keep records	Jot a one-line note of "with whom, for what" on the back of the receipt. Build a habit of entering it into cloud accounting software right away.
2	Apportion reasonably	Calculate the "how much you used it for business" share using a method based on the actual situation (area, time, distance, number of cases).
3	When in doubt, ask a tax accountant	Expenses booked on a "probably fine" basis can be disallowed in a tax audit. Confirm large ones in advance.

Switching to the blue return widens the scope of expenses

Blue-return filers have expense benefits not available under the white return, such as the special provision for small-amount depreciable assets (immediate expensing under ¥300,000) and salary for full-time blue business employees. If you are still on the white return, it is worth considering switching to the blue return (→ see the "Blue return vs. white return" column).

FAQ

What is the criterion for whether something is an expense?

The criterion is "is it an expenditure needed to earn business revenue?" Items shared with private use (rent, communication costs, cars, etc.) are prorated for personal/business use by the share used for business. It is important to be able to explain and record the basis for the share.

How do I decide the personal/business proration rate?

Calculate it on a reasonable basis such as area ratio, ratio of hours used, or distance driven. Since too high a proration may be disallowed, keep objective grounds on record.

Can an expenditure without a receipt be booked as an expense?

Items for which no receipt is issued, such as train fares, can be booked as expenses if you record the date, amount, and purpose. Books, receipts, and the like must in principle be kept for 7 years (some for 5).

What happens if a gray-area expense is disallowed?

An expense whose connection to the business you cannot explain is disallowed, becoming subject to additional tax and delinquency tax. Malicious padding is subject to a heavy additional tax. Confirm anything you are unsure of with a tax accountant.

Sources / official information

This article is based on the following official information. Systems may be revised. Please check each official site for the latest information.

* The content of this article is for informational purposes and is not tax or legal advice. For individual tax judgments, please consult the tax office with jurisdiction or a tax accountant.