This AI tax deduction could be worth up to S$36,000
At the S$50,000 cap, the additional tax benefit each year could be S$25,500 for a company, or up to S$36,000 for a partnership.
A critical tax detail for YA 2027
An accountant recently pointed me to a public consultation published by the Ministry of Finance on 8 June 2026: a proposed Finance (Income Taxes) Bill that would introduce a new category of qualifying AI expenditure under the Enterprise Innovation Scheme.
The broad policy had been announced in Budget 2026. The consultation draft is more useful for anyone considering a purchase because it shows the proposed scope in legislative form.
For Years of Assessment 2027 and 2028, businesses would be able to claim a 400% tax deduction or allowance on up to S$50,000 of qualifying AI expenditure each year.
To be sure, the YA 2027 window depends on your financial year end, not on when the legislation is passed.
A Year of Assessment generally relates to the financial period ending in the preceding calendar year. For an established business with a 31 December year end, YA 2027 generally covers expenditure incurred from 1 January to 31 December 2026.
For a business with a different financial year end, the answer is easy to get wrong. As at 1 August 2026:
31 March year end: the YA 2027 basis period likely ran from 1 April 2025 to 31 March 2026, so it has already closed.
30 June year end: the YA 2027 basis period likely ran from 1 July 2025 to 30 June 2026, so it has already closed.
30 September year end: the YA 2027 basis period likely ran from 1 October 2025 to 30 September 2026, so it is still open.
31 December year end: the YA 2027 basis period likely ran from 1 January 2026 to 31 December 2026, so it is still open.
The S$50,000 cap applies separately to YA 2027 and YA 2028, and unused cap from one year cannot be carried into the other. A firm that plans across both years can claim on up to S$100,000 of qualifying expenditure. A firm that misses one window loses that year’s cap.
So the position depends on your year end.
If your year end is 31 March or 30 June, the YA 2027 window has already closed. A new purchase cannot be moved back into it and would ordinarily fall into YA 2028 instead. But if your firm incurred qualifying AI expenditure during that period, you may still be able to claim it once the rules are settled. The practical step is to gather the contracts, invoices and service periods for that expenditure now, while the records are easy to find.
If your year end is 30 September or 31 December, the YA 2027 window is still open, and there is time for genuine expenditure to fall within it. You can also plan purchases across both years with both caps in mind.
Incurred is not the same as paid
One caution on timing. Under current Enterprise Innovation Scheme guidance, an expense is generally incurred when the legal liability to pay arises, not simply when cash is paid. Paying an invoice early does not necessarily bring the whole amount into YA 2027, and final guidance on subscriptions and usage-based billing has not yet appeared.
Before committing to a purchase with a particular Year of Assessment in mind, it is worth checking the timing with your accountant.
What may qualify
The draft Bill proposes to cover subscriptions and licences for AI systems. It also lists AI business services including system development, consultancy and strategy, data and analytics, system engineering and compliance, and system-related training.
The proposed categories appear broad enough to potentially cover expenditure your firm may already be incurring:
Business subscriptions to general AI tools such as ChatGPT Business and Claude Team, the same tiers I recommended for law firm use.
Specialised legal AI software, including Northbridge Lab’s products for personal injury, insurance litigation, conveyancing and general litigation.
Bespoke workflow software and related implementation and consultancy work.
Practical AI training for legal teams.
The draft also contains limits:
Hardware is excluded.
Grants must be deducted from qualifying expenditure.
Mixed AI and non-AI expenditure may need to be apportioned.
There is no cash-payout option for this category.
The Ministry has said expressly that the draft is not final and should not be relied on for decisions, and detailed IRAS guidance has not yet appeared. A consultation response has been promised by the fourth quarter of 2026, and I will cover the final rules when they land.
What does 400% actually mean?
A 400% deduction is not a 400% refund. Assume a firm incurs the maximum S$50,000 of qualifying expenditure. The proposal would produce S$200,000 of total deductions. Since the expenditure would usually have received an ordinary 100% business-expense deduction anyway, S$150,000 is the additional deduction created by the incentive.
The scheme is not limited to companies. Under the draft, sole proprietorships, general partnerships and LLPs should also be in scope, with the deduction flowing through to the proprietor or partners and taking value at their personal rates, which may be higher or lower than 17%.
At the S$50,000 expenditure cap, the figures are:
Company at the 17% headline corporate rate: S$34,000 gross tax effect, including S$25,500 of additional benefit from the incentive.
Sole proprietor, or partner in a partnership or LLP, at a 15% personal rate: S$30,000 gross tax effect, including S$22,500 of additional benefit from the incentive.
Sole proprietor, or partner in a partnership or LLP, at the 24% top personal rate: S$48,000 gross tax effect, including S$36,000 of additional benefit from the incentive.
Because there is no cash-payout option, the deduction is only worth money against taxable profit. A newly formed or loss-making practice would get a larger carried-forward loss rather than cash now.
How this relates to Northbridge Lab
Northbridge Lab builds specialised software for legal work. Our systems use AI for document extraction, retrieval, review and drafting, together with the implementation work required to make those capabilities useful in practice.
Several components appear to fit the draft categories. Northbridge Lab cannot promise that every subscription or service fee will qualify, and no vendor honestly can: there is no approval mechanism, and the rules are not final. What we can do is describe our software and services clearly, and I am happy to help if your accountant needs anything from me.
I have written before about the twisted incentives created by software subsidies. A tax benefit should improve the economics of useful software, not turn unsuitable software into a good purchase. In my view, a deduction rewards the right behaviour in a way an upfront grant does not: AI software has real ongoing operating costs, so it makes sense to support sustained expenditure rather than encourage an inflated one-off project.
What to do this month
Three practical steps:
Check your financial year end with your accountant and work out whether your YA 2027 basis period is still open.
If it has closed, gather the contracts and invoices for AI expenditure you already incurred in that period.
If it is still open, plan any genuine AI purchases with both the YA 2027 and YA 2028 caps in mind.
If you are considering software, a bespoke workflow or practical AI training for your team, feel free to reach out.
The usual caveats apply: this article reflects publicly available information as at 1 August 2026. This is not accounting advice and I am not your accountant. The proposed legislation and administrative guidance may change.