Year-End Tax Preparation 2026

At the close of the tax year, we can already estimate the year's financial results, yet we are still within the window of time that allows various lawful actions. This is an opportunity to reduce our tax liability and, with it, increase the disposable income available to us. Below are a number of tools for lawfully reducing your tax liability.

New Since 2025: Decisions the Owner of a Closely Held Company Must Make Before December 31

Amendment 277 to the Income Tax Ordinance (the 2025 Arrangements Law) added a decision to the year-end list that was not there before. In September 2026 the Supreme Court rejected the request for a further hearing on the petitions against the law — so it is here to stay, and preparing for it is part of every year-end plan for a closely held company.

Dividend Distribution or a 2% Tax

A closely held company with "excess profits" — accumulated profits beyond the safety cushion the law allows — is liable to an additional annual tax of 2% on them, unless one of the alternatives or exemptions in the law applies. The main alternative: distributing a dividend during the tax year of at least 6% of the accumulated profits as at the end of the previous year (or of at least 50% of the excess profits), with the tax on the dividend paid on time.

What this means for this year: a distribution that is meant to count for the 2026 tax year must be made by 31.12.2026. The 2% tax is not deductible and is not credited against the dividend tax that will be paid in the future — so the choice between the alternatives should be made before year-end, based on a calculation, and not after the fact when the return is prepared.

Read our full article: The 2025 Arrangements Law — Trapped Profits, Mandatory Dividends and the 25% Rule →

The Ratio of Profit to Turnover — Section 62A(a1)

In a closely held company whose income from its activity is below ILS 30 million per controlling shareholder, profit above a 25% profitability margin on turnover may be attributed to the controlling shareholders and taxed in their hands at their marginal rate — subject to the exemptions in the law. The ratio is measured on the figures for the whole tax year, so year-end is the time to review the expected profitability and the salary-and-dividend mix of the controlling shareholders, before the numbers are locked in.

Our Amendment 277 exposure checker (in Hebrew) gives a first picture based on your company's figures. And if this year's profit differs materially from last year's, it is also worth checking the advance-payment rate in our advance-payments calculator for companies (in Hebrew).

Accelerating Expense Payments

If you report to the tax authorities on a cash basis, you can save tax by bringing forward the payment of various expenses into the current year. One way is to bring forward payment of past expenses, such as amounts owed to suppliers, salaries and social contributions for employees, vacation pay and severance, salary-related expenses and the like. Note that only payments actually transferred to the supplier or employee before the end of the year will be recognized as expenses in that year. Another way, relevant even if you report on an accrual basis, is to bring forward future expenses. Expenses such as advertising and marketing, purchases of consumables and the like can save you tax if you bring them forward by just a few days.

Deferring Receipts and Income

The law does not allow you to defer recording income that has actually been earned, but nor does it require you to collect future income. If you report on a cash basis, it is sometimes worth waiting a few days before collecting what a client owes you, so that the income is recorded in the next tax year rather than the current one. Note that sometimes the recommendation is the opposite — bringing income forward. That is the case if you have losses to offset this year, especially if, because of the type of loss or the type of entity you operate through, you would not be able to use the offset in the next tax year.

Offsetting Losses

The offsetting of losses against profits under the Tax Ordinance is a detailed subject. Whether and how a loss from this year or a previous year can be offset against different types of income depends on several factors, such as the nature of the activity in which the loss arose (business, capital losses and so on), the timing of the loss or the income, the type of income against which you wish to offset the loss (business, rent, salary and so on), and the type of entity through which you are registered.

It is important to know that while some offsets can be carried forward from year to year, others can only be made in the current year. For example, a business loss in the current year can be offset against a spouse's salary in that same year, but not in the next tax year. There are also types of losses that, if not used at the time and in the manner the law allows, are lost for good. Toward the end of the year, effective planning of this area is possible in a variety of ways — for example, bringing forward losses from selling assets at a loss, bringing forward losses from selling securities, deferring or bringing forward income from different sources, and so on. To calculate the optimal use of offsets, we need to consider all sources of income and their scale this year and in the coming years. Planning this correctly usually requires professional advice, but it can save you a great deal of tax, sometimes over several years.

Contributions to Education Funds, Provident Funds and Life Insurance

To encourage saving, the state grants a special tax benefit to self-employed individuals who save in education funds, provident funds and life insurance. For you, this is the best way both to enjoy the income and future cash flow and to save thousands of shekels in tax. As a reminder, an education fund (keren hishtalmut) can be withdrawn after six years for any purpose, and after three years for financing studies or professional training.

Some numbers: under Section 17(5A) of the Income Tax Ordinance, a self-employed individual may deduct as an expense a contribution to a self-employed education fund of up to 4.5% of their income, up to an income ceiling of ILS 293,397 in 2026 — that is, a deduction of up to ILS 13,203. In addition, contributions of up to ILS 20,566 per year (2026) enjoy an exemption from capital gains tax on withdrawal. Contributions can be made in monthly instalments or as a one-off payment, so it is worth making sure before year-end that the ceiling has been used — a contribution that reaches the fund only after December 31 may be attributed to the next year.

Donations and Investments in Start-ups

Another way to reduce tax liability is to make use of expenditures that carry a tax benefit. These expenditures provide a deduction or credit at an enhanced rate and so reduce the tax on taxable income. The best known is a donation to an institution recognized as a public institution (Section 46). Under this section, a donation to such an institution entitles an individual to a credit of 35% of the amount donated. In 2026 the credit is given where total donations for the year are at least ILS 207, and up to 30% of taxable income or ILS 10,354,816 — whichever is lower. The credit is determined by the year in which the donation is actually made, so a donation you are planning anyway is worth making by December 31 if you want it to count for the current year. Another option is investing in the research and development of a third party, which under certain conditions entitles the investor to a tax benefit. It is important to include these expenditures in your year-end planning, because the extent of the benefit also depends on the timing of the expenditure relative to the income period against which the credit is given, and on the ceiling of the qualifying amount.

Choosing the Right Structure — Self-Employed, Company or Another Entity

An individual earning high amounts sometimes considers moving their activity into a limited company. Since Amendment 277 the calculation is more complex: the ratio of profit to turnover and the limits on retaining profits in the company affect whether it pays off no less than the corporate tax rate does. If the move is being considered, year-end is a good time to examine it — but in light of the new law, we recommend consulting our firm before making a decision.

Read our full article: Limited Company or Self-Employed — and What Changed with Amendment 277 →

And of Course — the Inventory Count

Every business holding goods for sale must take an inventory count on December 31 each year. Under the Income Tax (Bookkeeping) Instructions, the count may be taken within 10 days before or after the balance-sheet date, with the adjustments needed to arrive at the figures as at December 31. A count taken earlier or later — up to one month before or after the balance-sheet date — is possible, but requires advance written notice to the assessing officer. The count must be quantitative and then valued — at cost or at realizable value, whichever is lower. Because of the inventory count, there is no point in bringing forward purchases of goods, since in any case these will be neutralized in the expense records if they are not included in the count. On the other hand, it is advisable to dispose of dead stock, giving the relevant notices for the destruction of the inventory.

The above article does not constitute a recommendation, professional advice or a legal opinion. If you have any questions, you are welcome to contact us — we will be happy to advise, accompany and represent you before the Israeli tax authorities.

Kind regards,
Hager-Alperowitz & Co. — Certified Public Accountants