If you’re registered as an Individual Entrepreneur (IE) in Georgia, you already know why this system is so attractive. You pay just 1% tax on turnover, no complicated accounting, no messy paperwork, and no high corporate taxes.

But there’s one question nearly every IE asks sooner or later:“Can I deduct my business expenses?”

The short answer is no, not under the 1% Small Business regime.

That answer often surprises people, especially those coming from countries like the US, UK, or Germany, where deducting expenses is a normal part of business. But Georgia’s tax system for small entrepreneurs works differently, intentionally. It’s built for simplicity, not flexibility.

The 1% model is one of the easiest tax systems in the world, but it also means you can’t reduce your taxable base by writing off purchases. Still, that doesn’t mean expense tracking is useless. There are smart ways to handle costs that keep you compliant and prepare you for future growth.

Let’s break down exactly how it works.

How Georgia’s 1% Small Business System Actually Works

The 1% regime is designed for individuals with moderate turnover and simple operations. It allows freelancers, consultants, and entrepreneurs to pay tax only on the total amount they receive from clients, their turnover, not their profit.

Here’s what that means in practice:

You register as an Individual Entrepreneur (IE).
You apply for Small Business Status with the Revenue Service Georgia.
If your annual turnover stays below 500,000 GEL, you pay only 1% of that turnover as tax.

It doesn’t matter whether you spend 50,000 GEL or 400,000 GEL on equipment, travel, or marketing. Your tax is still calculated based on what you earn, not what you keep after expenses.

This makes the system extremely simple. You don’t need complex accounting software, depreciation schedules, or itemised deductions. But that simplicity is the trade-off, no expense deductions.

For example:

You earn 300,000 GEL in total revenue.
You spend 100,000 GEL on marketing, software, and travel.
Under the 1% system, your tax is still 3,000 GEL (1% of 300,000 GEL).

Your expenses don’t reduce that number.

Why the 1% Turnover Tax Has No Expense Deductions

The logic behind this system is efficiency. The Georgian government introduced the 1% regime to make it easier for small businesses and foreign freelancers to operate without the usual bureaucratic complexity.

In most countries, you calculate tax based on profit, revenue minus expenses. That requires detailed bookkeeping, receipts, and audits. In Georgia, the turnover-based model skips all that.

The result:

Fewer administrative requirements.
Lower accounting costs.
Minimal reporting obligations.

But that simplicity comes with limits. You can’t adjust your tax by declaring additional expenses, because the 1% is applied automatically to gross income.

That’s why the system works best for service-based entrepreneurs with low operational costs, freelancers, consultants, developers, designers, or agencies billing international clients.

Why Tracking Expenses Still Matters

Just because expenses don’t reduce your tax doesn’t mean they don’t matter. Keeping accurate records helps you stay compliant, prepares you for future growth, and protects you in case of audits.

Even though you can’t use expenses to reduce your tax base, you should still record them carefully.

Why?

They prove your business is legitimate.
They help demonstrate real activity to the Revenue Service Georgia.
They’re crucial if you later switch to an LLC, where expenses do become deductible.
They support your credibility when applying for bank loans, residency, or investment.

Think of expense tracking as building a habit of financial transparency. It shows that your IE is a real business, not a passive income stream or hobby.

Which Costs Are Still Useful to Track

Here’s what you should continue recording, even if it doesn’t reduce your 1% tax.

1. Office Rent and Utilities

If you rent a workspace, keep copies of the rental contract and utility bills. They prove you operate actively from Georgia.

2. Equipment and Software Purchases

Laptops, cameras, phones, and subscriptions to tools like Adobe, Figma, or Slack all qualify as legitimate business expenses, even if they don’t change your tax bill.

3. Travel and Accommodation

If you travel to meet clients, attend conferences, or work remotely, keep receipts for flights and hotels.

4. Internet and Phone Bills

Connectivity expenses demonstrate that your business is ongoing and technology-driven.

5. Translation and Legal Fees

Translation is a common cost for foreign entrepreneurs. For example, English to Georgian translations for contracts, company registration, or communication with the Revenue Service Georgia are standard.

6. Marketing and Advertising

Online ads, domain renewals, website hosting, and software subscriptions should all be tracked.

7. Banking Fees

Service fees, currency conversions, or transfer commissions from Bank of Georgia, TBC Bank, or Liberty Bank are all legitimate operational costs.

These records don’t directly reduce your taxes, but they create a clear picture of your business and strengthen your accounting foundation.

When Expense Deductions Become Available

While the 1% IE model doesn’t allow expense deductions, there are situations when that changes. Let’s explore three.

1. Transitioning to an LLC

If your business grows beyond 500,000 GEL in annual turnover, your Small Business Status is revoked. At this point, the best next step is registering an LLC in Georgia.

LLCs are taxed differently. They pay 15% corporate tax only on distributed profits, not on total income. That means any legitimate business expense, from rent and payroll to hardware and software, can be deducted before calculating tax.

For instance, if your LLC earns 600,000 GEL and spends 200,000 GEL on operations, you only pay corporate tax on the remaining 400,000 GEL.

LLCs under Virtual Zone status can even reduce that to 0% corporate tax for foreign-sourced income.

2. Standard IE (Without Small Business Status)

If you lose your 1% eligibility but remain an IE, you can continue as a standard taxpayer. In that case, you switch from turnover-based to profit-based taxation.

Your rate becomes 20% on net profit (income minus expenses). This means you can finally deduct legitimate costs such as:

Rent and utilities.
Payroll and contractor payments.
Professional services like accounting or translation.
Equipment and travel.

However, the trade-off is increased complexity, more paperwork, mandatory accounting, and stricter reporting to the Revenue Service Georgia.

3. Virtual Zone or International Company Structures

If you decide to register a Virtual Zone company in Georgia, you get a hybrid model. You can operate with corporate-level accounting while keeping 0% corporate tax on foreign revenue.

You can deduct legitimate expenses from company accounts.
Dividends distributed to Georgian residents are taxed at 5%.
Expenses like IT infrastructure, software licenses, and salaries are all recognised.

This setup is ideal for IT professionals, SaaS founders, and digital agencies whose businesses have grown beyond the IE stage.

Common Myths About Deducting Expenses in Georgia

Let’s clear up a few myths that often circulate among foreign entrepreneurs and digital nomads.

Myth 1: “If I declare expenses, my 1% tax will be lower.”No. The 1% rate applies to your total income, not profit. Declaring expenses does not reduce it.

Myth 2: “If I buy equipment under my IE registration, it’s a deductible expense.”No. You can list it as a business purchase for record-keeping, but it won’t lower your tax.

Myth 3: “I can get a VAT refund for business purchases.”False. Most IEs under the 1% regime are not VAT payers, so you can’t claim input VAT deductions.

Myth 4: “If I add all my receipts to my tax report, I’ll pay less.”Incorrect. The Revenue Service doesn’t calculate tax that way for Small Business Status. The 1% is based solely on turnover declared in your monthly statement.

Myth 5: “I can mix personal and business expenses.”Dangerous. Doing so may trigger an audit. Always separate your personal and business finances, ideally with a dedicated account.

Understanding these myths prevents costly mistakes and helps keep your IE registration clean

Smart Ways to Manage Costs as a Georgian IE

Even without expense deductions, you can still manage your spending strategically.

1. Use a Separate Business Bank AccountOpen an account with Bank of Georgia, TBC Bank, or another local bank exclusively for business transactions. This keeps your accounting clear and helps when applying for Georgian tax residency or business loans.

2. Keep Receipts Translated into GeorgianInvoices and receipts in foreign languages should be translated by a certified English to Georgian translator if you plan to use them for tax or compliance purposes.

3. Plan Big Purchases Before Upgrading to an LLCIf you’re close to reaching 500,000 GEL, consider investing in major assets like computers or equipment right before switching structures. These expenses can then be deducted under your new LLC.

4. Use Georgian Suppliers When PossibleIt simplifies paperwork and ensures your invoices are automatically compliant with Georgian standards.

5. Keep Digital Copies of EverythingStore invoices, contracts, and receipts online. The Revenue Service Georgia accepts electronic records during audits.

These small habits build financial discipline that will benefit you long after you move beyond the 1% system.

Transition Planning: From 1% IE to LLC

Most entrepreneurs who start as Individual Entrepreneurs eventually grow beyond the 500,000 GEL limit. This is a good problem to have, it means your business is scaling. But it also means it’s time to think ahead.

When you exceed that limit, your Small Business Status is revoked, and your 1% tax rate disappears. If you continue as an IE, your income becomes subject to the standard 20% personal income tax. That’s a big jump.

The smart move is to transition to an LLC (Limited Liability Company) before you hit that point. An LLC gives you access to Georgia’s corporate tax system, where you can finally deduct legitimate business expenses.

What changes when you become an LLC:

You start paying tax only on distributed profits, not total income.
You can deduct expenses such as rent, software, travel, payroll, and utilities.
You get limited liability protection, your personal assets are no longer tied to business debts.
You can apply for Virtual Zone or International Company status for extra tax benefits.

The process of registering an LLC is simple and fast. With Gegidze, most businesses complete the transition in just one or two days.

Real Examples: How Deductions Work in Practice

Let’s look at two scenarios to show how Georgia’s different tax systems affect the way expenses are handled.

Example 1: 1% IE Regime

Anna is a freelance designer registered as an IE. She earns 250,000 GEL per year from international clients and spends 70,000 GEL on software, marketing, and rent.

Her tax: 1% of turnover = 2,500 GEL.

Even though she spends a lot, she still pays the same 1% because the tax is based on total income. Her expenses do not reduce the tax owed.

Example 2: LLC with Virtual Zone

Nika is a software developer who earns 600,000 GEL per year through his Georgian LLC with Virtual Zone status. He spends 200,000 GEL on salaries, rent, and infrastructure.

His corporate income tax:

0% on retained profits.
5% dividend tax when profits are distributed.

This means he pays nothing until he takes money out of the company. And when he does, the effective rate is far below 10%.

The key difference is control. As an IE, your tax is fixed at 1% on turnover. As an LLC, you decide when and how to distribute profits, and you can legally deduct expenses before that.

When Tracking Expenses Pays Off

Even if you’re still under the 1% regime, tracking expenses pays off in several ways.

1. It Protects You During Audits

The Revenue Service Georgia can ask for clarification about your income sources or activity. Having invoices and receipts proves your transactions are legitimate.

2. It Prepares You for Growth

When you eventually upgrade to an LLC, you’ll already have a record-keeping system in place. That saves you from scrambling later.

3. It Builds Credibility With Banks

If you ever apply for a loan, residency permit, or investment, clear expense documentation strengthens your case. Bank of Georgia, TBC Bank, and other institutions often request proof of active operations.

4. It Simplifies Residency Applications

Foreigners applying for residency by investment or tax residency in Georgia need to show consistent income and expenses. Having complete financial documentation makes the process faster.

Mistakes IEs Make When Handling Expenses

Some entrepreneurs get creative with their expense handling, and that’s where problems begin.

Mistake 1: Claiming Non-Business Expenses

Trying to classify personal spending (like dining, clothes, or vacations) as “business expenses” is risky. Even though it doesn’t lower your tax, it can lead to fines or status revocation if the Revenue Service finds irregularities.

Mistake 2: Not Using Georgian Invoices

All official documents submitted to Georgian authorities must be in Georgian. Submitting receipts or contracts in English without certified translation can lead to rejection. That’s why English to Georgian translation by licensed specialists is essential.

Mistake 3: Ignoring Currency Conversion Records

If you earn income in foreign currencies, the Revenue Service uses official exchange rates to calculate turnover in GEL. Not documenting conversions properly can create inconsistencies.

Mistake 4: Mixing Business and Personal Accounts

When all income and expenses flow through one account, it becomes nearly impossible to prove which transactions are business-related. Always use a dedicated business account.

Mistake 5: Assuming You Don’t Need to File Monthly Reports

Even if you have no income, IEs must submit a zero-income report every month. Failing to do so can trigger penalties or even automatic cancellation of your Small Business Status.

Avoiding these mistakes keeps your setup clean and ensures you remain eligible for Georgia’s low-tax benefits.

The Transition Threshold: When to Upgrade to LLC

Every entrepreneur hits a point where the 1% model becomes too restrictive. The typical signals are:

Turnover approaching 400,000–450,000 GEL.
Growing operational costs.
Working with larger clients who require invoices from legal entities.
Hiring contractors or employees.
Expanding into new business lines like SaaS or e-commerce.

At this stage, upgrading to an LLC isn’t just about avoiding penalties, it’s about unlocking better financial flexibility.

With an LLC, you can:

Deduct legitimate business expenses.
Operate under Virtual Zone or International Company status for 0–5% corporate tax.
Pay dividends at only 5%.
Continue banking with Bank of Georgia, TBC Bank, or Liberty Bank under corporate accounts.

Gegidze can manage the transition for you, including closing your IE, registering your LLC, and translating all necessary documents.

Key Differences Between IE and LLC Expense Rules

This table shows why the IE system is best for simplicity, while the LLC model is better for scaling and expense optimisation.

Preparing for Audits and Record Requests

Even though Georgia’s system is business-friendly, the Revenue Service occasionally reviews IE filings, especially for foreigners with high turnover.

To avoid issues:

Keep all invoices in Georgian.
Store receipts for at least five years.
Maintain digital and physical copies of all contracts and payment proofs.
Be ready to explain large payments or withdrawals.

A clean accounting record keeps your business audit-proof and shows you’re serious about compliance.

How Gegidze Helps IEs and LLCs Stay Compliant

Georgia’s tax system is straightforward, but it still requires accuracy and understanding. That’s where Gegidze makes a difference.

We help with:

Registering and maintaining Individual Entrepreneur and LLC structures.
Applying for Small Business Status or Virtual Zone approval.
Monthly tax filings with the Revenue Service Georgia.
Certified English to Georgian translations for contracts, bank documents, and legal filings.
Accounting and reporting for IEs, LLCs, and International Company setups.
Guidance on transitioning between tax regimes when your business grows.

Our goal is simple: to make your business legally sound, financially efficient, and fully compliant, so you can focus on growing instead of worrying about tax rules.

Simplicity First, Structure Later

Georgia’s 1% IE system is one of the simplest tax models in the world. It’s perfect for small-scale entrepreneurs who want low taxes and minimal bureaucracy. But as your business scales, simplicity becomes a limitation.

You can’t deduct expenses, defer taxes, or hire employees efficiently under the IE model. At that point, switching to an LLC or applying for Virtual Zone status becomes a strategic necessity.

Knowing when and how to make that transition is key to keeping your Georgian setup both compliant and profitable.

If you’re operating under Georgia’s 1% Small Business regime and wondering whether your expenses qualify for deduction, it’s time to get clarity.

Book a free consultation with Gegidze today.

We’ll review your IE registration, your current expense structure, and your growth plan, and help you decide whether it’s time to move to an LLC, Virtual Zone, or International Company setup.

With professional translations, tax filings, and compliance handled, you can enjoy Georgia’s business advantages with full confidence.

Frequently asked questions (FAQs)

Can Individual Entrepreneurs (IEs) in Georgia deduct business expenses under the 1% tax regime?

No. Under the 1% Small Business Status, tax is calculated on total turnover, not profit. This means business expenses such as rent, travel, or equipment do not reduce your taxable amount. The 1% applies to your total income, regardless of costs.

Should I still track my business expenses if they are not deductible?

Yes. Keeping records of rent, software, marketing, and English to Georgian translation costs helps prove legitimate business activity to the Revenue Service Georgia. These records also make future transitions to an LLC or Virtual Zone company easier.

When can I deduct expenses as a Georgian entrepreneur?

You can deduct expenses once you move beyond the 1% IE system, for example, after registering an LLC in Georgiaor applying for Virtual Zone status. LLCs pay tax on profit (revenue minus expenses), allowing full expense deductions for operating costs.

Can I reduce my 1% IE tax by showing receipts or invoices?

No. Submitting receipts or invoices does not lower your tax. The Revenue Service Georgia calculates the 1% tax based solely on your declared turnover. Expense documentation supports compliance, not tax reduction.

How can Gegidze help IEs manage expenses and transition to an LLC?

Gegidze helps entrepreneurs with tax filings, accounting, and English to Georgian translations for invoices and legal documents. We assist with transitioning from IE to LLC, applying for Virtual Zone or International Company status, and ensuring full compliance with Georgian tax law.