What deductions can you claim as a small business?

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As a small business owner in Australia, understanding the spectrum of tax deductions available to you can significantly impact your overall tax liability.

You may find more tax-saving opportunities that propel your business forward. Effective tax management not only ensures compliance but also enhances your ability to reinvest in your business. You can claim a tax deduction for most expenses you incur whilst operating your business if they are directly related to earning your assessable income.

Firstly, it is important to note that there is no single definition for a ‘small business’. Different laws define ‘small business’ differently. However, for tax purposes, it is generally a business (sole trader or partnership) with an aggregated turnover of less than $10 million. If this is you, your business may qualify for various tax deductions that small businesses can claim.

In order to claim these deductions, it is critical for business owners to keep comprehensive records, time expenses appropriately, and plan significant purchases around tax time to optimise tax outcomes.

We provide detailed insights into each category to help you maximise your returns.

1. Immediate asset write-offs

The immediate asset write-off scheme allows small businesses to claim immediate deductions for new or second-hand plant and equipment assets, such as vehicles, equipment, and machinery.

For the 2023–24 income year, the instant asset write-off threshold is $20,000.

The instant asset write-off can be used for multiple assets as long as the cost of each individual asset is less than the $20,000 threshold. The measure will apply to eligible assets that are first used or installed and ready for use between 1 July 2023 and 30 June 2024.

Claiming immediate write-offs

To claim an immediate write-off, ensure that:

  • The asset was purchased, used, or installed ready for use within the financial year you claim.
  • The asset is used principally for business use, with any personal use being clearly documented and accounted for.

2. Motor vehicle expenses

Motor vehicle expenses can be significant for many small businesses. The ATO allows deductions for vehicles used to run your business.

You can claim:

  • fuel and oil
  • repairs and servicing
  • interest on a motor vehicle loan
  • lease payments
  • insurance cover premiums
  • registration
  • depreciation (decline in value).

Methods for calculating expenses

Logbook method:
Keep a logbook for 12 continuous weeks to establish a business use percentage. You can then apply this percentage to all vehicle expenses, including depreciation.

Cents per kilometre method:
Claim a set rate for each business kilometre travelled, up to 5,000 kilometres per car per year. The set rate includes all your vehicle running expenses.

Actual cost method:
The actual cost method is where you claim expenses based on actual receipts. You must use this method if you operate as a company or trust, regardless of the type of vehicle you’re claiming for or if you are claiming for a motorcycle or a van.

3. Business travel expenses

Travel expenses related to your business can be deductible when properly documented. Keep detailed records of the nature of the trips, including dates, destinations, and the business purpose of each trip.

Eligible expenses include:

  • Accommodation: When travelling for business, the cost of overnight accommodation is deductible.
  • Flights: Air travel expenses for business trips are claimable.
  • Daily allowances: Payments to cover meals and incidental costs when travelling for business can be claimed based on ATO guidelines.

4. Salaries and wages

One of the most common deductions for small businesses involves costs associated with salaries, wages, bonuses, and other compensation paid to employees. These expenses are deductible when they are incurred in the direct pursuit of generating business income.

Requirements for deductibility

To ensure these costs are deductible:

  • Payments must be made to legitimate employees under a formal employment contract.
  • The employment must be directly connected to your business operations.
  • PAYG (Pay As You Go) withholding requirements must be met, which involves deducting tax from employee wages and sending these deductions to the ATO.

Maintaining accurate and detailed records, including employment contracts, payment records, and details of all related expenditures, is critical to substantiate these deductions.

5. Depreciation

Depreciation allows small businesses to allocate the cost of tangible assets over their useful life, recognising the wear and tear on assets such as computers, machinery, and office furniture used in business operations.

Depreciation methods

Two primary methods to calculate depreciation deductions are allowed by the ATO:

  • Prime cost method: Calculates depreciation based on a fixed percentage of the asset’s initial cost, spread evenly over its useful life.
  • Diminishing value method: Provides a higher depreciation rate in the earlier years of the asset’s life, recognizing that assets often lose value more quickly early on.

To apply these methods, you must know the effective life of the asset, which the ATO publishes guidelines for.

Accelerated depreciation

Small businesses can also take advantage of simplified depreciation rules, such as the instant asset write-off (mentioned above) for eligible assets or accelerated depreciation rates under certain conditions. These can significantly impact cash flow and tax liability in the acquisition year.

6. Professional services

Expenses incurred for professional services that are directly related to the operation of your business are generally deductible. These include:

  • Legal fees: Costs associated with business-related legal advice, contracts, disputes, and compliance.
  • Accounting and tax preparation fees (that’s us): Fees related to managing the business’s financial records, tax planning, and preparing and filing tax returns.
  • Consulting fees (could also be us): Payments for expert advice to improve business efficiency, productivity, or profitability.

To claim these deductions:

  • The expenses must be directly connected to how you earn your business income.
  • Retain all documentation, including invoices and receipts, to support the expense claim.

7. Advertising and marketing

Advertising and marketing expenses that promote your business and can be directly linked to earning income are deductible. This includes:

  • Advertising in various media such as newspapers, online, radio, and television.
  • Digital marketing, including SEO, pay-per-click campaigns, and social media advertising.
  • Promotional materials like flyers, brochures, and business cards.

Keep detailed records of all advertising and marketing expenditures, including contracts, agreements with advertising agencies, and receipts for related expenses.

8. Receiving loans or borrowing money

Expenses incurred to obtain the borrowed funds can be claimed as a deduction, provided the money is used to produce assessable income.

These expenses can include legal costs, registration fees, valuation costs, fees to guarantee an overdraft, and any commissions paid. However, depending on the extent of the expenses, you may have to spread the deductions over more than one year to cover the loan period.

These deductions are quite separate from the interest actually incurred on the borrowed funds, which is also deductible if the borrowed money is used to produce income.

Make the most of your small business tax concessions.

Understanding and effectively utilising these tax deductions can lead to substantial financial benefits for small business owners.

Businesses can maximise their deductions and minimise their overall tax burden by meticulously documenting expenses and ensuring compliance with ATO guidelines.

Engaging with a tax professional like those at Rispin Group can provide invaluable assistance in navigating the complex landscape of tax deductions, ensuring that your business makes the most of its eligible tax-saving opportunities.

If you would like to book a consult with us, contact admin@rispin.au or call 03 9674 3680.

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