What is a tax deduction? 

A tax deduction is a reduction in the amount of income that is subject to taxation, which can ultimately lower the amount of taxes owed to the government. In other words, a tax deduction is an allowable expense that can be subtracted from a taxpayer's income, resulting in a lower taxable income and a lower tax liability. Tax deductions can help individuals and businesses reduce their tax burden and keep more of their earnings. Some common examples of tax deductions include mortgage interest, state and local taxes, medical expenses, and business expenses like rent, salaries, and utilities.

What are SARS tax-deductible business expenses?

Before we get into specific types of business tax deductions in South Africa, let’s look at the basic definition of a tax-deductible business expense.

According to SARS, tax-deductible business expenses are “expenses incurred in the operation of a business”. In other words, any purchase you make for the purpose of running your business counts as a business expense.

Tax-deductible business expenses reduce the amount you pay taxes on. For example, let’s say you made R600,000 during the tax year and made business purchases worth a total of R50,000. In this case, your business taxable income would be R550,000 instead of R600,000, reducing the amount of tax you owe for that year.

Tax-deductible business expenses in South Africa

Tax-deductible business expenses are numerous and apply to most types of businesses. Here’s a list of tax-deductible business expenses in South Africa that you might be able to claim to reduce your bill next tax season.

1. Day-to-day business expenses

This includes all financial outgoings that are incurred as part of running your business, such as:

• Material and equipment costs
• Employee costs and administration costs
• Business/office rental costs
• Office supplies
• Phone costs
• Travel and transport, including business vehicle costs
• Uniforms (if needed)
• Wholesale purchase costs for goods resold
• Financial charges (such as bank fees), utilities
• Legal fees
• Insurance fees
• Marketing, advertising and promotion costs

If you have a home office, you can also claim a percentage of your home expenses for work use. This includes:

• Rent or mortgage
• Insurance
• Rates and taxes
• Repair costs to the premises
• Utilities
• Cleaning

The percentage you can claim depends on how often you work from home and how much of the space is used for business purposes. It’s a good idea to check with a tax advisor on how much you can deduct.

2. Capital expenses

Capital expenses are purchases of major physical goods or services intended to be used long-term by your business. This includes:

• Equipment and machinery
• Business vehicles
• Renovation costs
• Hardware, such as computers

3. Education expenses

If you invest in education for yourself or your staff that directly relates to operating your business, you can deduct the cost as a business expense.

4. Entertainment expenses

All expenses incurred while entertaining clients are tax deductible. This includes drinks, meals, live entertainment and venue hire. However, you must be able to prove to SARS that the expenses were incurred in pursuit of business.

5. Business Start-up expenses

These are expenses relating to your business that were incurred before your first year of trade. For example, if you purchased equipment for the purpose of running your business three months before starting to trade, you could claim it as a tax-deductible business expense.

6. Net operating losses

Any losses you have incurred in the same business in previous years can be carried forward as a tax deduction.

Sole proprietor vs. company: Can both claim business expenses?

In South Africa, whether you’re registered as a sole proprietor or a company, you are entitled to claim legitimate business expenses as tax deductions.

However, if you run your business as a sole proprietor – that is, your business is not a separate legal entity from you – the income you make from trading must be reported as part of your personal income tax return. There is also no “ minimum threshold” to meet before you are required to file taxes.

As a sole proprietor, it may be the case that you have both business expenses and personal expenses you can claim as deductions on your personal income tax return. With this in mind, it’s important to keep comprehensive, separate lists of business expenses and personal expenses.

Simplifying business expenses with turnover tax

If you are registered as a company or sole proprietor in South Africa, you can choose to pay either standard small business income tax rates or elect for turnover tax. Turnover tax is a simplified tax rate aimed at reducing administration for small businesses with an annual turnover of less than R1 million.

What does this have to with business expenses? Well, to make record keeping easier, the turnover tax system automatically estimates a company’s business expenses when calculating taxable income. This means businesses registered for turnover tax don’t need to track and report their tax-deductible expenses.

Additionally, small business owners will usually pay a lower tax rate under the turnover tax system than the standard tax system, and may not even have to pay tax at all depending on their annual income. The minimum tax threshold for the 2020-2021 tax season is as follows:

Standard small business minimum amount of taxable income: R83,100

Turnover tax minimum amount of taxable income: R335,000

For many small business owners, there are advantages to opting for turnover tax over the standard small business tax.

However, keep in mind that expenses are purely an estimation under the tax turnover system. So if you have very high tax-deductible expenses that would reduce your taxable income significantly, it may be in your best interest to claim them under the standard tax system.

Staying on top of your business expenses

Regardless of your business structure, tracking your expenses regularly is key to managing your finances effectively, maintaining positive cash flow and ensuring accurate record-keeping.

With QuickBooks, it’s easy to track your expenses and income throughout the year, from anywhere on any device. And when tax time rolls around, you’ll have all the information you need at your fingertips to file your business tax return quickly and correctly.

Get prepared for tax time early.

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