How Far Do Expenses Go?

By MISAWA Masaki, Certified Tax Accountant (Zeirishi, Reg. No. 157367) — formerly of Japan’s tax authorities · Published July 12, 2026 · Reviewed July 17, 2026

A sole proprietor’s business income is calculated by deducting necessary expenses from gross revenue. Necessary expenses are the costs directly required to earn that revenue, together with selling, general and administrative expenses and other costs arising from the year’s business.

The three categories of spending

Where judgment becomes difficult is spending that relates to both your business and your private life. Japanese tax law thinks of expenditures in three categories. First, spending solely for the business — this is, naturally, a necessary expense. Second, spending solely for living (household expenses): food, hobby and leisure spending. These are not deductible. Third, spending with both characters (mixed household/business expenses, kaji kanren-hi): rent and utilities for a home that doubles as an office, or a car used for both business and private purposes.

How mixed expenses are apportioned

Mixed expenses can be included in necessary expenses only where they are necessary for the conduct of the business and the necessary portion can be clearly separated — and only to that extent. There is no statutory formula for making the split; it rests on a reasonable basis suited to the nature of the expense. In practice, apportionment is commonly based on the floor area used for business in the case of rent, on floor area or hours of use for utilities, and on days of business use or distance driven for a car.

A home-office worked example

A worked example (assumptions: home rent of ¥150,000 per month; in a 4LDK layout, a room used exclusively for work accounts for 25% of the total floor area, and that room is used only for the business). Here it is considered possible to include ¥150,000 × 25% = ¥37,500 per month, or ¥450,000 per year, in necessary expenses. Electricity can likewise be apportioned using the same floor-area ratio or the ratio of business hours. Note, however, that there is no fixed formula for apportionment; in every case it comes down to a reasonable basis reflecting how things are actually used.

Evidence that supports the split

What matters in apportionment is less the ratio itself than keeping evidence that can explain the ratio. If you retain the materials on which the split was based — the lease and floor plan, a work diary, driving records — you will be able to respond if asked to explain in a tax examination. A baseless “let’s call it 50%” will not be accepted.

Trips that mix business and private

The same thinking applies to spending that mixes business (meetings or purchasing on site) with private purposes (visiting family) — for example, the cost of a trip back to your home country. Where the trip is recognised as directly necessary for the business and the business portion can be reasonably separated, that portion is treated as includable in necessary expenses. Because this is judged substantively from the purpose, destination and duration of the trip, it is important to keep records of the itinerary and the business conducted. The costs attributable to accompanying family members or to sightseeing are treated as non-deductible.

Deciding what qualifies as a necessary expense is not something to be done all at once at filing time; it begins with your day-to-day records. Keep business bank accounts and credit cards separate from personal ones, and record the purpose of each outlay when you do the bookkeeping — this makes it far easier to explain the nature of an expense later. Precisely for the spending you are unsure about, keep the records first and then consider the treatment. (See our note: What Is the Blue Return?.)