The 400% AI Tax Deduction Is Becoming Law. Here's What That Actually Means for Your SME.

What just happened: The Ministry of Finance closed public consultation on the Finance (Income Taxes) Bill 2026 on 1 July. Among the 20 amendments to the Income Tax Act is the codification of a Budget 2026 measure: a 400% tax deduction on qualifying AI expenditure, capped at S$50,000 per year of assessment, for YA2027 and YA2028.

In plain terms: spend S$50,000 on qualifying AI tools, deduct S$200,000 from your taxable income.

What counts as qualifying AI expenditure: The Enterprise Innovation Scheme (EIS) now lists AI expenditure as a qualifying activity alongside R&D, IP registration, and training. The S$50,000 cap applies per YA, and the deduction rate is 400% — significantly higher than the standard rate. Qualifying spend is expected to include AI software and platform subscriptions, AI-powered business tools integrated into operations, and licences for AI-enabled accounting, ERP, or inventory systems.

Why this matters now: The deduction applies to YA2027 and YA2028. That means expenditure incurred in your financial year ending in 2026 and 2027. You get two years. S$50,000 each year. S$100,000 of qualifying spend translating to S$400,000 in deductions.

What you should do: Review your current software stack. If you're already paying for AI-powered tools, track that spend separately. If you've been considering upgrading to an AI-enabled accounting or ERP system, this deduction makes the effective cost significantly lower. Keep invoices, contracts, and usage records. Talk to your tax advisor about how to structure spending across both years.

The fine print: The Bill is still in draft — public consultation has closed but Parliament hasn't passed it yet. The final scope of qualifying AI expenditure will be confirmed when IRAS publishes detailed guidance. But the direction is clear. The government wants SMEs to invest in AI. And they've put real money behind that intention.

Source: Ministry of Finance, 3 Jul 2026
https://www.mof.gov.sg/news-resources/newsroom/public-consultation-on-proposed-finance-income-taxes--bill-2026/