Tax-deductible business expenses are one of the best ways for small businesses to save money. Understanding how and what you are able to claim can significantly impact your financial year.
This article lists tips that can help business owners identify and maximise tax deductible business expenses.
By exploring tax-deductible business expenses, you can better manage costs and invest in growth while running your business more efficiently.
Valid Business Deductions Defined
Generally, you’re able to claim a tax deduction for most business expenses incurred as a business owner. Additionally, these deductions can reduce your taxable income.
Below are the most common business expenses for which you are able to claim tax deductions.
Motor vehicle expenses: Costs associated with using a vehicle for business purposes.
Travel expenses: Incurred during business trips, like accommodation and meals.
Home office expenses: Costs related to running a home-based business, like utilities and office supplies.
Business insurance: Premiums paid for insurance policies covering business risks.
Subscription fees: Costs of professional subscriptions and memberships.
Bank fees: Charges related to business bank accounts and transactions, including interest from your business loans.
Depreciating assets: Deduction of the decline in value of business assets like equipment, mobile phones, computer equipment and machinery.
If you’re unsure if an expense is deductible, you can check with an adviser or consult the Australian Taxation Office (ATO) to maximise your tax return.
Not Valid Expenses
While there are many tax-deductible business expenses, there are notable exceptions. Business owners who are aware of these can potentially avoid issues during tax time.
Below are certain business expenses that usually won’t allow you to claim a deduction.
Domestic expenses: Costs related to personal and household activities.
Private expenses: Personal expenses not associated with running your business.
Superannuation contributions: Contributions made for personal superannuation.
Car expenses for private use: Costs incurred when using a car for personal purposes.
Personal contributions: Non-business-related contributions to any entity or cause.
You also can’t claim a deduction for the cost of capital assets, as these are often dealt with under capital gains tax.
Additionally, tax-deductible business expenses may be limited for costs related to personal services income, as they must be directly related to the company portion of your income.
Tips For Maximising Tax Deductions
The following sections will discuss various tips on maximising your tax deductions to help you claim tax deductions effectively and reduce your taxable income.
Consulting the Australian Taxation Office (ATO) and seeking professional tax advice can further help with business tax deductions.
Review Your Records
Under tax law, business owners will typically maintain records that explain all transactions related to their business. These records must be:
In writing, either on paper or electronically.
In English or a form that the ATO can readily access and convert into English.
Kept for a minimum of five years or longer as necessary.
This practice not only supports your tax return but also helps manage your business income and expenses effectively.
Keep Clear And Accurate Records
Consider keeping clear and organised records to maximise business tax deductions.
Detailed records of purchases and goods/products sold can make filing for tax deductions stress-free. This can enable you to accurately report assessable income and business-related expenses.
Consider having a good filing system to let you easily access records when needed, facilitating the process of claiming tax-deductible business expenses and preparing your tax return.
Check For Eligible Gifts And Donations
You can claim gifts or donations as tax-deductible business expenses if it follows four specific conditions:
The gift or donation must be made to a deductible gift recipient (DGR).
The gift must be a donation, meaning you do not expect anything in return.
The gift must be money or property, including financial assets.
You must have a record of the donation, such as a receipt.
It’s advisable to consult a registered tax agent if you need further information on how to claim a tax deduction for donations and gifts.
Accepted Advertising Deductions
You can claim a tax deduction for advertising your work in any way. This includes traditional and digital advertising methods to promote your small company.
Advertising expenses reduce your assessable income and are considered an allowable deduction if you keep an accurate record of the business expense.
Determine Industry-Specific Deductions
The ATO has specific rules for industry-specific tax-deductible business expenses, which you can claim for your small business.
Travel expenses: Expenses for company travel, including accommodation and meals.
Depreciating assets: Deductions for the decline in value of assets used in your business.
Tools and equipment: Costs for purchasing tools and equipment necessary for your industry.
Uniforms and protective clothing: Expenses for industry-specific uniforms and protective gear.
These generally deductible expenses can help reduce your assessable income.
Accounting For Asset Depreciation
Depreciating assets are items that lose value over time due to wear and tear or obsolescence. Examples include machinery, vehicles, and office equipment.
Some can be for immediate deduction, while others can be for temporary full expensing, depending on the asset and the following factors:
Asset cost: The initial purchase price of the asset.
Effective life: The asset’s estimated duration of use in the company.
Usage: How much the asset is used for business versus private use.
Depreciation method: Whether you use the prime cost or diminishing value methods.
These can help reduce taxable income and capital expenses of small businesses as long as you keep proper records.
Mixed Business And Private Use Expenses
For an expense made for both business and private use, you can only claim the portion used for business purposes. You will typically need records to prove this use for your tax deduction.
Consider the following to determine the correct tax deduction for mixed-use expenses:
Actual cost method: Calculate the full cost of the expense and the exact amount used for business.
Records required: Maintain detailed logs and receipts to support your claim.
Business use: Ensure that the claimed portion is directly related to running your small business.
By accurately separating company and private use expenses, you can maximise your tax deduction while complying with ATO regulations.
Mind The Business Portion
When managing mixed expenses, consider identifying the expenses related to the business portion of your costs.
This can ensure that your tax deductions are accurate and reflect the actual use of resources for your small company.
You can categorise specific expenses to differentiate between personal and business use. This practice can not only help claim tax deductions but can also provide a clearer picture of how to pay tax during your income year.
Conclusion
Saving more money while running your business is possible by effectively utilising tax deductions. A tax deduction reduces most expenses over the financial year, potentially allowing your small business to make significant savings.
Consider knowing the deadlines and requirements to claim deductions for capital expenses, immediate deductions, and replacement expenses to maximise your tax benefits.
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Got more questions? Get in touch with our friendly team via phone at 1300 005 864 or email sales@lumi.com.au.
Disclaimer: We try our best to fact-check all information and keep it up-to-date, but this can not always be guaranteed. All of the information shared is for general use only and should not be considered personalised financial advice. Make sure to consult an accredited accountant and/or tax agent for personalised advice on matters related to your business’s or personal finance.
