As a small business owner there is always a lot going on and for many its often a struggle when it comes up to the end of financial year. Knowing what a small business can claim on tax each year can be challenging if you don’t have the right support. That’s why we’ve put together this guide to cover what you can claim as a business expense (and what you can’t), as well as the rules around recording and reporting, and more.
A quick recap
As a small business owner, you can claim a deduction for most costs incurred in running your business via your annual business tax return.
The amount of tax your business has to pay depends on your business’s taxable income. The Australian Taxation Office (ATO) calculates your taxable income using this formula: Assessable income – tax deductions = taxable income.
- Assessable income is generally income your business earns. It includes all gross income (before tax) from your everyday business activities (sales etc.) as well as other income that is not part of your day-to-day business activities, for example, capital gains. It does not include GST payable on sales you make, or GST credits.
- Deductions are amounts you can claim for expenses involved in running your business.
You must lodge an income tax return for any year you run your business. You need to do this even when you don’t expect you’ll owe tax.
What expenses you can't claim
Before we get going on all the small business expenses you can claim, let’s take a quick look at some of the expenses that are not deductible. These include:
- Entertainment expenses
- Traffic fines
- Private or domestic expenses, such as childcare fees or clothes for your family
- Expenses relating to earning income that is not assessable, such as money you earn from a hobby
- The GST component of a purchase if you can claim it as a GST credit on your business activity statement.
Remember, if you earn PSI (Personal Services Income), your deductions may be limited.
Small Business Tax Returns
Whether you’re operating as a sole trader, trust, partnership or company, our Chartered Accountants are here to get your business the best tax outcome. Enquire now or call 1300 180 630 for a no-obligation consultation and FREE quote.
The 'rule of thumb'
While you can claim most expenses involved in running your small business, just make sure:
- They relate directly to earning your income.
- The expense must have been for your business, not for private use.
- If the expense is for a mix of business and private use, you can only claim the portion that is used for your business.
- You have records to substantiate what you claim.
Keeping records
Thriday simplifies expense tracking with its built-in receipt scanner, ensuring effortless digital storing and compliance for tax time. This feature streamlines record-keeping, making it easy for users to maintain accurate financial documentation and enhancing their preparedness for tax audits. Thriday’s receipt scanner is a valuable tool for businesses aiming for efficiency and meticulous financial management.
We say this a lot, to all our clients, but we can’t stress enough the importance of keeping records. From plane tickets, business credit card statements to business car leasing statements and business bank account fees, you need records to back up any claim you make in your business tax return.
This is what our friends at the ATO have to say about record keeping:
- If you claim business tax deductions, you’ll need to keep records to substantiate what you claim. Under tax law, your records must explain all transactions and be:
- In writing, either on paper or electronically.
In English, or in a form that we can readily access and convert into English. - Kept for five years (although some records need to be kept longer).
Types of claimable expenses
Broadly speaking small business expenses fall into the following core categories:
- General business operating expenses
- Business travel expenses
- Home-based business expenses
With expenses it’s important to remember that if you’re a contractor or a consultant, your PSI (Personal Services Income) may affect the deductions you can claim.
Let’s take a closer look at each core category:
General business operating expenses
As we’ve already mentioned, if you need to spend money on your small business to generate income, it’s likely you can claim a deduction for these expenses.
Typical small business operating expenses that can be claimed include:
- Business loan interest rates
- Accounting fees
- Subscriptions to publications
- Employee benefit programs
- Advertising and marketing costs
- Membership Dues
- Legal fees
- Insurance expenses
- Wages paid to all contract workers
- Interest paid
- Continuing training and education expenses
- Laundry charges
- Equipment rentals
Office supplies and expenses - Printing expenses
- Office space rent
- Repair and maintenance costs
Tip: Filling in an expense log with the time, date and reason for purchase is a fantastic way to prove costs were business-related.
Business travel expenses
If you’ve travelled to attend a business conference or taken an international business trip to meet a customer, the good news is that you should be able to claim those travel expenses as a deduction on your tax return.
Typical business travel expenses include:
- Transport costs including train, bus, taxi (including Uber and other rideshare services) and airfares
- Accommodation and meal expenses for overnight business travel, and
- Certain motor vehicle expenses.
There, are however some specific rules that apply to different travel categories:
Motor vehicle expenses
As a small business owner, you can claim a tax deduction for certain costs in relation to motor vehicles – cars and other vehicles – used in running your business. The expenses you can claim depend on a number of factors including:
- Do you own or lease the vehicle?
- How is the vehicle used – is it solely a business car or used for private purposes also?
- The structure of your business, and
- The type of vehicles you use in running your business.
Once established, you can typically claim the following types of deductions on your business tax return:
- Vehicle repairs and servicing
- Fuel and oil
- Business vehicle insurance premiums
- Business vehicle registration
- Interest on a business car loan
- Business car leasing payments
- Tax depreciation if you own the vehicle outright.
If you use the vehicle for both business and personal purposes, you will need to apportion the costs between business and personal use and only the business portion will be deductible.
Overnight business travel expenses
For overnight business travel there are two key record keeping requirements you need to remember depending on length of stay:
- 1 to 5 nights– you must retain documentation such as tax invoices, tickets, and boarding passes as evidence of travel expenses.
- 6+ nights – you will need to retain documentation as above, plus you’ll also need to keep a travel diary of all business activities you undertake (including details of what the activities were and the dates, times, locations etc.).
Private travel
If your travel is partly for private purposes and includes private activities, bear in mind that you may have to pay fringe benefits tax (FBT) on the expense.
Employee travel expenses
If your employees travel for your business, the business must actually pay for the travel expense to be able to claim it as a deduction. The business can pay for the expense by:
- Paying directly for the expense from the business account
- Paying a travel allowance to the employee
- Reimbursing the employee for their expenses.
Fringe benefits tax (FBT) may also apply if your business pays for or reimburses your employees for their travel expenses, however certain exemptions and concessions may apply that can reduce your FBT liability.
Home-based expenses
If you operate a small business (including an online business) from home, you may be able to claim tax deductions for some of the costs relating to the areas of your home (such as a home office or study) that you use for business purposes.
Home-bases business expenses are often categorised as follows:
- Occupancy expenses – including mortgage interest or rent, council rates and home insurance premiums, and
- Running expenses – similar to operating expenses, running costs relate to costs such as gas and electricity, repairs to furniture and furnishings, phone, and internet etc.
What you can claim will be dependent on your personal circumstances and how you operate your business from home. It’s worth noting that small business owners running a business from home may also have to pay capital gains tax when the home is sold.
Other expenses
It’s important not to forget other expenses that can be claimed over a number of years such as capital expenses which are the investments your business makes to improve or maintain your regular operations. Remember to consider claiming for:
- The instant business asset write-off
- Depreciation of business assets
- Prepaid expenses
Examples include buildings, vehicles, computers, and equipment.
How to claim your business expense deductions
Claiming your business expense deductions depends on your business type:
- Sole trader – claim the deductions in your individual tax return in the ‘Business and professional items’ schedule, using myTax or a registered tax agent.
- Partnership – claim the deductions in your partnership tax return.
- Trust – claim the deductions in your trust tax return.
- Company – claim the deductions in your company tax return.
Small Business Tax Returns with POP Business
Pulling together everything you need for your tax return can be arduous, but the team at POP Business are ready to lend a hand. Our qualified experts can undertake the work required for you to maximise your small business expense deductions and complete your company tax return. Call us to today to find out more – 1300 180 630, or follow the links below to get started.
Small Business Tax Returns
Whether you’re operating as a sole trader, trust, partnership or company, our Chartered Accountants are here to get your business the best tax outcome. Enquire now or call 1300 180 630 for a no-obligation consultation and FREE quote.
