Small business tax accountant

Accounting Tax Deductions for Small Businesses

What You Can Claim and When

It is important you are aware of accounting tax deductions for small businesses if you run a business yourself. As a small business owner, you are able to claim a tax deduction for most business related expenses, so long as they are incurred during the running of your business and they relate directly to the earning of assessable income.

Generally, you are able to claim operating expenses for each income year (such as supplies and wages). Capital expenses, such as those to do with equipment, machinery, and buildings, are claimed over a longer time period. Expenses which meet these criteria are referred to as allowable deductions. You can claim these deductions when submitting your yearly tax return.

What you CAN Claim

As a business owner, you are only allowed to claim expenses which relate directly to your ability to earn assessable income.

For example, if you purchase/use an asset for both private and business purposes, you are only allowed to claim a tax deduction on the business-related portion of this expense. If an item or asset is only used for part of the year, you are required to reflect this when claiming any deduction.

What you CANNOT Claim

You are unable to claim any deduction for goods and services tax expenses if your business is eligible to claim these expenses as a GST credit.

Also, you are unable to claim:
• Domestic or private expenses, such as personal items or childcare fees
• Expenses which relate to your non-taxable income, such as income earned from a hobby
• Specifically non-deductible expenses, such as fines and entertainment.

Expenses you can Claim in the Year they are Incurred

These are generally referred to as ‘revenue expenses’. These are the expenses incurred during the everyday running of your business.

You are able to claim a tax deduction on most revenue expenses in the year they are incurred.

Examples include:
• Bank fees and charges
• Sponsorship and advertising costs
• Bad debts
• Business vehicle expenses
• Business travel expenses
• Clothing expenses (uniforms etc)
• Depreciating assets with a cost of less than $1000 if you are a small business
• Electricity expenses
• Education, professional or technical qualification expenses
• Home office expenses if your home is used as a business premises
• Fringe benefits
• Interest on money borrowed for employer super contributions, tax obligations, or to produce assessable income
• Legal expenses, such as those incurred through obtaining legal advice, borrowing money, defending future earnings or discharging a mortgage
• Luxury car lease expenses
• Losses from a previous year
• Parking fees
• Costs for running a business website, such as internet service provider fees, site maintenance, content updates etc
• Stationary expenses
• Phone expenses
• Public relations expenses
• Accountant and registered tax agent fees
• Rates on business premises
• Costs for the maintenance and repair of income-producing property
• Small-value items which cost $100 or less
• Wages, salaries, bonuses, and allowances
• Costs for outdoor clothing and equipment if your business activities require outdoor work
• Subscription costs for professional journals, business information services, newspapers and magazines
• Super contributions for employees and some contractors
• Tender costs, even when a tender is unsuccessful
• Union dues and periodical fees for professional or trade associations
• Transport and freight expenses
• Trading stock, including delivery charges
• Water expenses on business premises
• Tax related expenses such as having a bookkeeper prepare records, attending an ATO audit, appealing or objecting to your assessment, and obtaining tax advice for your business.

Expenses you can Claim Over Time

These are referred to as ‘capital expenses’.

Generally, a capital expense is either:

• An expense which is associated with establishing, enlarging, replacing, or improving the structure of your business
• The cost of an asset which has a relatively long lifespan (generally longer than one income year).

Usually, you are unable to claim the total capital expense in the year you paid for it. You generally make claims for any decline in value which that asset experiences each year.

You are able to ‘pool’ these capital assets and claim depreciation for the entire pool. For small businesses with assets worth less than $1000, the total amount can be claimed in the year it is incurred.

Capital assets usually depreciate in value over the time you use them. They can also be known as depreciating assets, and can include:
• Electrical tools
• Computers
• Plant and equipment
• Motor vehicles
• Furniture, curtains and carpet
• Fixtures and improvements on land, such as fences and buildings.

A set of rules applies across the variety of depreciating assets and capital expenditure. In summary, the life expectancy of an asset (in years) usually determines the number of years you must apportion the cost.

Some assets are excepted from these depreciation rules, usually these are assets which apply to construction costs relating to capital works. Capital works can include:
• Structural improvements
• Improvements to land, such as fences and buildings
• Environment protection earthworks

You are allowed to claim these capital works expenses at 4% per year over 25 years, or 2.5% per year for 40 years.

Other capital expenses

There are other business-related capital expenses for which you can claim deductions, as long as these expenses aren’t covered by any other part of tax law. An example could be the cost of setting up or dismantling a business. This is referred to as black hole expenditure. Black hole expenditure can be claimed over five years.

When is an expense is incurred?

An expense is generally incurred whenever you have a current legal obligation to pay for goods or services. Generally, an invoice is not necessary for an expense to have been incurred.

Claiming expenses paid in advance

These expenses are covered by a different set of rules. For small businesses (with an annual turnover of less than $2 million), the small business prepayments concession can be used to claim deductions on expenses prepaid for goods to be received in full within 12 months. This also applies if the 12-month period includes the following income year.

If you are a small business owner it is highly advisable you utilise a qualified Melbourne business accountant, like Kingston and Knight Accountants to monitor your accounts. Contact us today on (03) 9863 9779 or email us on