Small business owners and sole traders can often fall into old habits come tax time, without considering some of the less obvious or most recent tax deductions available. To remain competitive and keep a healthy bottom line, businesses need to be smarter and sharper every financial year.
Generally speaking, you can claim most expenses you incur in running your business as deductions to reduce your assessable income, but there are exceptions. For example, you cannot claim deductions for private or domestic expenses. Entertainment, fines and some other expenses are also specifically excluded. Here are some things that businesses might overlook come tax time:
Banking and accounting expenses
When it comes to running your business, common deductions include accounting, book-keeping or business activity statement (BAS) preparation, as well as general advertising and marketing costs. However, some commonly overlooked deductions include bank fees and charges related to your business account, interest on business loans or overdrafts, as well as franchise fees that are not part of any initial purchase.
Prepaying your expenses can attract a tax deduction that is commonly overlooked. You can prepay expenses to cover a time-frame not exceeding more than one year to bring forward your operating expenses before the end of each financial year. Subscriptions, certain business travel expenses, training events, leases, rent, phone, internet, insurance and business asset repairs are just a few examples of expenses you can prepay.
Review your asset acquisition
Need new assets? Well now may be a good time to purchase them. As part of the recent 2015 budget, small business and sole traders have been given a $20,000 tax deduction for any small business or sole trader with an active ABN, whose turnover is less than $2 million. Businesses or sole traders need to purchase physical items outright, which they can then claim back as a tax write-off. The items purchased can be brand new or second-hand and need to relate to the business. This new deduction goes through to June 30, 2017. It is scheduled to go back to the original $1,000 threshold after that time. Also, check against your balance sheet to ensure you don’t forget to write off any assets no longer held or used before the end of the financial year.
Stock and inventory
With tax deductions, every little bit counts, so take a good look at your stock, 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. You will also need to consider how to value your stock trading every financial year, as you may be entitled to a tax deduction when the opening stock exceeds the closing stock.
You can deduct staff wages, salaries, bonuses and commissions arising before the end of each financial year, even though you might not have physically made the payment to the employee by that date. This is because it still counts as work performed within that financial year, despite the salary and wages not appearing in the employee’s PAYG payment summary until the next financial year.
Financial loss and bad debts
Don’t overlook the possibility of facing a financial loss this year. Speak to your financial advisor to discuss steps that can be taken to minimise the impact, and what can be done to help offset the loss against other incomes, such as salaries and wages. You will also need to prove that you have made a genuine attempt to recover any bad debts that may have arisen. Your financial advisor can explain how to document the debt as evidence the amounts were written off before the end of the financial year.
If you get on top of all of these deductible costs you can make the most of your tax return this EOFY.
Tax laws and regulations change frequently, and their application can vary widely based on the specific facts and circumstances involved. You are responsible for consulting with your own professional tax advisors concerning specific tax circumstances for your business. Intuit disclaims any responsibility for the accuracy or adequacy of any positions taken by you in your tax returns.
If you have questions regarding accounting issues specifically related to your industry or your business circumstances, you should consult with your own professional tax advisor, accountant, attorney, industry expert or professional association.
While it is easy to keep track of larger, direct charitable donations, it’s the little things that can be easily overlooked. Your donation must be $2 or more, and you need to ensure it is made out to a deductible gift recipient charity – that way you can claim the full donated amount on your tax return. Remember to keep proof by way of receipts or bank statements.
You can deduct a ‘gift’, provided it truly is a voluntary transfer of money or property where you receive no material benefit or advantage. However, there are some things you can’t claim, such as raffle or art union tickets, items such as chocolates and pens, and the cost of attending fundraising dinners.
Home office deductions
While there are a growing number of small businesses operating from home, many still fail to claim a tax deduction for any business use of their home. Many fear the deduction process is too complex, or that it could lead to other tax implications on their property moving forward. These reasons should not deter you from claiming what you are entitled to come tax time. The best way to ensure transparency is to simply obtain the right tax advice early on in the game to see exactly what portion of home use you can deduct as use for business purposes. Speak to your accountant or bookkeeper about the process for claiming home office costs.
Many new businesses, especially in the heat and panic of getting their startup off the ground, forget to accurately track all expenses incurred beforehand. So as soon as you begin making sales, ensure you don’t overlook those startup expenses as deductions. The most important thing is to maintain accurate and detailed records and receipts from the outset. Accounting software, such as QuickBooks Online, can help you stay on top of expenses and streamline your reporting.
Traditionally, it has been easy to deduct desktop software expenses, as it is simply a full deduction in the financial year the software was purchased and installed. However, with the proliferation of cloud-based business tools, marketing platforms, automation systems and tracking tools, things can get a little tricky. If you are paying for cloud-based software, you can deduct the monthly charges that apply within the relevant financial year. There is no dollar limit provided you have proof of your ongoing payment plan.
Remember to consult a professional tax advisor, accountant or bookkeeper if you have tax questions specifically related to your industry or your business circumstances. Every business is different, so the deductions you can claim will be different as well.