34 Tips on Small Business Tax Deductions and What to Claim

SMALL BUSINESS AND TAX

Just how important small business is can be demonstrated by the fact that the government gives the small business sector a break on a range of tax matters.

For small businesses just starting, the government recently introduced additional tax relief, which may help to reduce the tax burden in those difficult early days.

Called small business tax concessions, there are several options that smaller enterprises can take up if they satisfy that $10m turnover test.

The new relief applies to all businesses with an aggregated turnover of less than $10m a year (which will be most businesses in start-up phase) and allows an immediate deduction for many professional costs incurred in starting a business venture, such as costs for accounting and legal advice, as well as a range of government charges and taxes.

The relief can also be claimed by individuals who intend to set up a small business through another entity such as a company or trust. In other words, the entity which claims the deduction for start-up costs (the individual) need not be the same one, which ultimately runs the business (the company or trust).

WHAT CAN BE CLAIMED?

A new business can immediately deduct costs incurred in getting advice from a lawyer or accountant on how to structure the business. This includes advice on whether to set up the business as a company, trust or partnership, how the business should be financed, the costs of market research, and so on. It also covers costs incurred in actually setting up the legal structure of the business.

Eligible costs would also include professional advice on the viability of the proposed business (including due diligence where an existing business is bought) and the development of a business plan. Also covered would be the costs associated with raising debt and equity capital for the operation of the proposed business.

Note that you can claim the deduction even if the business doesn’t go ahead. For example, you might prepare a business plan, which ultimately demonstrates that the business will not be profitable, and hence choose not to proceed.

It’s also now possible to claim an immediate deduction for a range of payments to government agencies relating to the regulatory costs incurred in setting up the new business. This includes costs such as the fee for creating a company as well as costs associated with transferring assets to that entity, such as stamp duty.

Some of the more obvious nuggets on the list worth considering are:

• Advertising and sponsorship costs
• Bank fees
• Tender costs (even if the tender is unsuccessful)
• Travel expenses for relocating employees
• Interest on some borrowings
• Home office expenses such as a portion of your rent or mortgage (See the ATO website) for more information
• Insurance premiums including car, building or cover for professional or public liability
• Key office expenses such as electricity bills, phone bills, rates, water bills, rent or lease payments for business premises, repairs or maintenance to the property
• Business memberships and magazine subscriptions
• Education, technical or professional qualifications expenses
• Tax expenses such as preparing and lodging tax returns and BAS

Also, the not so obvious:

Buy assets now and benefit

Meanwhile, there are still a few weeks to take action on some other lucrative tax perks your small business may have overlooked. Do you need new assets? Now maybe a good time to purchase them. As part of the 2017 federal budget, small business and sole traders have been given a $20,000 asset purchase tax deduction for any entity with an active ABN, whose turnover is less than $10 million. The items purchased can be brand new or second hand and need to relate to your business. This new deduction has been extended and goes through to June 30, 2018.

Also, under this perk, if you want to purchase a phone or a laptop for your small business but will also be using it for personal use, you can claim a deduction on the portion that is used for business use.

Erase bad debt

Review bad debts before the end of the financial year to reduce your tax bill - If the debt is unlikely to be recovered, write it off now. This would prevent the debt from becoming taxable income, which would require the business owner to pay tax on the amount.

There are several other steps small businesses should undertake before June 30, including checking their current debtor ledger, identifying debts where the other party is bankrupt or has entered into liquidation, and noting debts that are more than six months old.

Assess stock

It’s also the time for small businesses to review their stock and inventory. Identify any damaged or obsolete stock and write it down or write it off. This exercise will impact the value of the trading stock and your profit margins.

Gather up those records

An easier step for owners is to add up all those work-related expenses that may not be immediately obvious such as donations, including political donations, car maintenance, business travel, stationery, and other office supplies.

A quick scan around your small business will no doubt result in dozens of tax deductions, but strangely some of the most lucrative ones get forgotten. So take the time to make sure you sniff out every deduction this year. After all, it’s money that belongs back in your pocket.

Deductions for Interest Incurred

The availability of deductions for interest are typically affected by the following factors:

• Interest must have a sufficient connection with the income-earning activities of the taxpayer
• interest on a new loan is deductible if the new loan is used to repay an existing loan, which. At the time of the second loan, was used to produce assessable income or as part of a business to produce assessable income
• interest on borrowings will not continue to be deductible if the borrowings cease to be employed in the borrower’s business or for some income-producing activity, or which are used to earn exempt income
• interest may still be deductible even if the borrower’s business has ceased. This rule can apply to other assessable income-producing activities but would not apply to the derivation of exempt income
• interest may be deductible if incurred prior to a business commencing or assessable income being derived
• the character of the interest is generally determined by the use to which the borrowed funds are put
• the “rule of 78” may be used in limited circumstances to calculate the interest component of installments paid under a fixed-term loan or extended credit transaction . Penalty interest for early repayment of a loan may be deductible, and
• an interest deduction can be claimed for money borrowed for the business to pay a tax debt.

Companies

Interest costs incurred by companies may be deductible if the money:

• is used to repay share capital to shareholders if that capital was employed as working capital in the company business and is used to derive assessable income, or
• funds the payment of a declared dividend to shareholders where the funds representing that dividend are employed as working capital in the company business, and it is used to derive assessable income.

A deduction is not allowed if the borrowed funds are used to:

• repay share capital to shareholders to the extent it represents bonus shares paid out of an unrealized asset revaluation reserve or other equity accounts (for example, internally generated goodwill), or
• pay dividends out of unrealised profit reserves.

Borrowing Expenses

If costs are incurred to obtain a loan, the costs of arranging it are allowable as a deduction to the extent the loan is used to produce assessable income. Expenses claimable under this heading include:

• legal expenses associated with mortgage documents
• valuation fees incurred
• procuration fees and mortgage insurance (if any)
• stamp duty payable on mortgage documents, and
• any other cost items for taking the loan.

If the total cost of these expenses is less than $1 00, ii can be claimed in the income year the expense is incurred. However, if more, the claim will need to be spread equally over the lesser of the loan term or five years commencing from the date the loan was entered into.

If you incur borrowing costs on several dates for different facilities, you cannot simply add them to the opening balance of your yet-to-be-deducted borrowing costs for that year. It is necessary to do a separate calculation for these new borrowing costs.

Review your subscriptions

The end of the financial year (EOFY) is a perfect time to see if your business is paying for services and software that you don't use.

One of the easiest ways to start with subscriptions is by looking at the last time you logged in. Often, you end up having lots of little subscriptions. Even Spotify, it's $10 a month. Moreover, if you use Hootsuite for your social media platforms, but you're actually posting directly to all of your social channels, then why pay for it?

Depending on your business's cash flow, you may want to consider paying premiums in advance.

If you have the ability, pay the premium in advance, you know, for 12 months rather than doing it month by month. Sometimes that will add maybe $100, $200 a year to the cost of a premium. So it's a built-in interest charge, even if it's not said to be that.

Don't think of your accountant as the "taxman."

Despite seeing value in what they provide, he admits that many business owners see the cost of compliance as a "necessary evil."

Many business owners view their accountants as the taxman when, in fact, they are there to help you. They are there to save you money, get back deductions, get you refunds and make deductions possible.

As a business owner, you may not realise that when you run a business, the lines are not as direct concerning individuals. If you're an individual, you claim a deduction against your employment income. There has to be a direct connection between how that expense helps you generate your employment income, how you got your pay, and your wages. When you're in business, it's a little bit wider.

For small business owners to see the value in accountants, it’s encouraged that you consider it outsourcing, "like anything else."

Getting someone to do your tax return is an outsource of a function of your business that's required/ Generally when you outsource somebody, you expect them to do a better job than you would. I don't know how to change a washer, I don't know how to fit out a bathroom, so I'm going to hire a plumber.

Some deadlines aren't set in stone

With tax, some deadlines are absolute (the due date of your small business tax return, for example). However, others aren't set in stone. For businesses that want to move across to a digital accounting platform for the next financial year, but haven't done so by 1 July 2017, don't think you've missed the boat.

It doesn't have to be 1 July, because it's digital and because you can upload bank statements from the last 3 to 12 months.

Have the system set up and have the bank feeds connected, and you can start at any time. The first of July is quite a nice point to land on, but the first of any quarter, if you're making your business activity statements quarterly, is also a good time that you can get going.

There's always a learning curve that's involved in this; there's always time to get up to speed.

You can't outsource everything to your accountant

While we’re all for small businesses using an accountant at tax time, there is still some onus on the small business owners themselves when it comes to tax.

The accountant certainly should have a good understanding, but the business owner should remain inquisitive about what's going on and should ask questions about their account. 'Can I claim this if spend this? Can I claim that?' Moreover, it progresses from there as a discussion to whether it ends up in the tax return."

The balance also comes into play from both the accountant's and the business owner's experiences. An accountant works in a variety of industries and so can bring tax and business insights from there, but a business owner has insights from his industry that he can bring to the table.

We will also add that from a legal perspective, "small business owners are always required to verify deductions in their text return."

Accountants aren't just there for tax

Small businesses that are going to or do use an accountant: when you connect with your accountant, use that as an opportunity to ask them to look over your business position. Accountants are not just there for tax.

Using this time or other moments throughout the year to have your accountant provide insights into the ways you could improve your sales or profit margins is a good move.

Use the skills your accountant has because they run a small business, as well. We understand the pressures that small businesses have because we suffer the same fate of what's going on in the economy.

Use the tax time to also have a chat about your business generally and find out other ways that your accountant can help you benefit going into the next 12 months.

INSTANT ASSET WRITE-OFF

One of the best tax breaks for small business remains the instant asset write-off, which is a great way for your business to acquire some much-needed capital assets to build your business and, at the same time, reduce your taxable profits.

Despite continual calls for the government to make the much-loved $20,000 instant asset write-off a permanent fixture, the government has continued to string SMEs along, extending the scheme for just 12 months at a time.

Regardless, it’s still around this year until June 30, and small business owners can still claim up to $20,000 worth of assets for their business up until that point. If you purchase an asset (for example, a new coffee machine or circular saw), you can immediately claim a deduction for the business portion of that asset up to $20,000.

Better still, the tax break has recently been made more generous. Assets costing up to $30,000 can now much-needed off immediately (previously $20,000 up to 29 January 2019 then briefly increased to $25,000 for item acquired between 29 January 2019 and 2 April 2019; the new $30,000 limit applies to any qualifying asset purchase made after 2 April 2019). Also, more businesses can make a claim; previously available only for businesses with an aggregated turnover of less than $10 million, that turnover threshold increased to $50 million from 2 April 2019.

Amongst the items, you could look at claiming are the following:

• Cash registers and other POS devices
• Cars, vans and utes
• Fittings and fixtures for your premises
• Plant and machinery for your trade
• Computers, laptops and tablets
• Security systems
• Accounting software

To minimise your chances of having the ATO challenge the deduction, here are some key tips to be aware of:

Only small businesses qualify. This might seem obvious, but you have to be in business to be a small business, not just a holder of an ABN number.

Understand what the tax break is. It is not a cash hand-out but a deduction from your taxable profit. If you spend $30,000 on a capital purchase, you will receive a 27.5% percent deduction, which equates to an $8,250 reduction in your tax and means you will still be out by over $20,000 on the purchase. If it’s something you were going to purchase anyway, good luck and enjoy the benefit, but if you’ve acquired something, or are planning to acquire something, purely to save tax, you might want to think again. What you gain in the year of purchase will gradually be clawed back through reduced deductions in future years.

The amount you can claim is GST exclusive. This is relevant if your business is registered for GST and can claim an input tax credit on the purchase. The amount you can claim is the GST exclusive price.

The asset must have been installed and ready for use. This is particularly important if you purchased the asset just before the end of the financial year. If you’d purchased it before 30 June but didn’t have it available for use until July, you could only claim the deduction against next year’s profit.

Second-hand assets. You can claim a deduction for second-hand assets.

Beware private use. To claim the full deduction, the asset has to be used in the business, and if there has been personal use, the deduction needs to be pro-rated to reflect this.

TRADING STOCK

The Tax Act provides a set of simplified trading stock rules whereby if your trading stock did not change in value over the tax year by more than $5,000, you could include the same stock value at year-end as at the start of the year. If you needed to do one, you’d have done a stocktake by now, but this might be something to be aware of for next year.

PRE-PAID EXPENSES

A small business can also get an immediate tax deduction for certain pre-paid business expenses that were made before the end of the financial year. If a payment covered an expense that has gone into the new financial year (like insurance premiums, rent or membership of a trade or professional body), you could claim that deduction in the last financial year. Check your payments for the period before 30 June to see if anything qualifies.

GST

Taking care of your GST obligations can be made less of a headache as well, as eligible businesses are only required to account for GST once payment is received. On top of that, you can also pay GST in instalments, and the Tax Office will work out for you how much the instalments are. A small business can also, if using some items for private uses, choose to claim the full GST credits and make one single adjustment for the percentage of private use at the end of the tax year.

Another concession available to small business concerns pay-as-you-go tax instalments, where you can pay a quarterly instalment that is worked out based on your most recently assessed tax return. The income recorded there is adjusted to align with the latest increase in gross domestic product and will save you the time and the effort in having to do the 'long-form' calculations. Read our GST tax guide for more information.

Delay invoicing before 30 June

If you’re a small business (less than $10 million turnovers) and you know that a customer pays you promptly and you will receive the money before 30 June, then delay invoicing until 1 July. Similarly, if you’re a large business, consider delaying your invoicing until after 1 July to defer tax as well.

Embrace the cloud

Once upon a time, you had to keep every paper receipt tucked away in an envelope in an overstuffed filing cabinet. Now you don’t need to keep paper receipts, and all of your deductions can be stored safely in the cloud. If you’re a business you might want to consider a cloud-based solution such as Xero, Quickbooks or MYOB.

Incur or Pay for deductions before 30 June

This one seems obvious, but every year I meet so many people who forgot about buying a new computer, upgrading their mobile phone or making a donation until after 1 July when it’s too late. The best idea is to make a list of what you need and a plan to buy it well before the end of June when you may be tempted to forget.

Pay Super

If you have staff, pay their superannuation before 30^th June to receive a tax deduction this year and make sure you pay super for yourself.Too many business owners risk not having enough super upon retirement. My rule of thumb for how much super you should be paying for yourself? At a minimum, the amount that would be paid if you were to go and get a job.

Revisit your Structure

Is your business in the most tax-effective structure? If you are a sole-trader, then you have no choice but to pay tax on all the profits of the business whereas this is not the case for other structures such as partnerships, companies or trusts. There are also asset protection implications that are worth considering for changing structure, and while insurance can protect you, trading via a company or trust can provide another layer of protection.

Logbooks

Make sure your log books are up to date. For motor vehicles, this means your logbook needs to be less than five years old. If you’re in a Company or Trust structure and your cars in that entity, consider keeping a logbook on those vehicles now thanks to changes to FBT, which means the number of kilometres travelled is now irrelevant to the percentage your FBT is calculated on. A 20 percent flat rate applies when calculating a car fringe benefit under the statutory-formula method, regardless of how many kilometres the vehicle travels annually.

Look into your crystal ball.

If you know that next year you’re going to drop income because you’re going to take gardening leave, maternity leave, or you’re going to have some major expenses, you might want to look at the timing of your tax-deductible expenses. That’s because it may be worthwhile in this year to prepay expenses while your income is higher. This may include travel, insurance, interest on loans up to twelve months or insurance.

Tax planning tips to start working on today

If you have not experienced a successful partnership with your advisor, consider the following tax planning tips for more successful outcomes:

Prioritize your time

Be prepared to invest your time into your tax affairs. It’s an important aspect of your business that should be afforded regular attention.

Budget a consultancy fee

There will be a cost, and this should be built into your planned expenditure. Rest assured, with the right advisor; it’s money well spent: the benefits will far outweigh the costs.

Schedule an introductory session with your advisor

You will need to discuss your needs with your advisor, together with your budget. You should also agree on the scope and timing of works and the associated scheduling.

Always pick up the phone

Ensure the arrangements you make with your advisor enable uninhibited communication. Always pick up the phone, particularly about material transactions.

Have a robust pre-financial year-end review

This will generally include the modelling of tax positions with the status quo; considerations of alternative improvement options; and the implementation of agreed actions, including the completion of any required documentation.

Hold meetings with your advisor

Booking a meeting and allocating the required amount of time to it creates a great focus for all.

We often find that, because of this focus, conversations flow better, and there is a greater level of exchange of information between parties. Strategies can be improved and produce better outcomes.

Remember you don’t know what you don’t know

The tax rules are complex and have many moving parts that may be relevant to any business decision.

Your professional advisor is highly trained, with a team behind them experienced in customising business strategies. For the best results, use this expertise.

Know what’s on the ATO’s watchlist

Each year the ATO likes to let Australians know the things it’s keeping an eye on when it comes to tax time, and 2018 is no exception.

Earlier in June, assistant commissioner Kath Anderson let small businesses in on what the tax office is keeping in its sights. This time around, it includes work expenses for car use, laundry, and home offices.

If you’re working from home, you may be eligible to claim a deduction for work furniture, heating and cooling, computers and equipment contained in a home office, but only if those things are contained in a separate home office space, warns founder of Healthy Business Finances Stacey Price.

Also on the ATO’s hit list is a cryptocurrency, following a year of unfathomable gains for many digital currencies in the market. The tax office has warned investors in currencies such as Bitcoin or Ethereum that the ATO has “sophisticated systems that allow us to match data from banks, financial institutions and online exchanges.”

Laundry claims are also in focus, with the tax office warning business owners away from “unreasonable” clothing claims.

Many taxpayers do wear uniforms, occupation-specific or protective clothing and have legitimate claims. However, far too many are claiming for normal clothing, such as a suit or black pants.

Your Claim For A Business Tax Loss Can Be Denied

Business owners are naturally keen to be able to absorb a business loss as a tax deduction, but it also pays to not stray too far from the generally accepted rules regarding tax losses — there are circumstances where the ATO is legitimately able to deny such claims.

The ATO has the discretion to disallow the deduction of a tax loss if, during the relevant income year, the business attempting to make such a claim earned assessable income (or realised a capital gain) that would not have been derived had the loss been unavailable as a deduction (our emphasis).

The tax law has measures in place to ensure such deductions are limited to those businesses that are legitimately eligible — such as the continuity of ownership and the same business tests — but there is also the measure above, which the ATO calls an “integrity” safeguard, that may result in a denial of a claim for losses that business owners should keep in mind.

There is some balance to the rules in that the Commissioner of Taxation is “prevented” from disallowing the deduction should “continuing shareholders” stand to benefit from the relevant income. However, there is still a fair amount of discretion left to the Commissioner in how the business loss rules are applied.

WHAT IS A SMALL BUSINESS?

From a tax perspective, a small business is defined as one with an annual turnover of less than $10 million.

To stop businesses splitting activities so they can slip under the $10 million threshold and gain access to the various tax concessions, the law stipulates that turnover needs to be calculated from the 'aggregated' amounts, which basically means annual turnover (which is gross income, excluding GST) of every 'connected' or 'affiliated' business.

Starting and running a small business is a labour of love, albeit a challenging one at times. Like anything in life, it’s important to take a break and recharge. If you’re a small business owner, you might be wondering if it’s possible to take a break without worrying. The key is preparation. While working in your small business may not afford you spontaneity, taking the time to plan can leave you sweating the sun and not the small stuff.

If you’re a small business owner and you haven’t taken a break in a while, read on to find out how you can switch off while your business ticks over.