Welcome to part 3 of our small business bookkeeping explained series. This series aims to explain, in plain English, the most important aspects of small business bookkeeping.
If you’re already breaking out in a cold sweat save yourself the time and hassle and have us do it all for you, but if you’re not there yet, then read on!
Tax deductions for small business
Most of the expenses involved in running your business can be claimed as tax deductions. The deductions can help reduce your assessable income but they MUST be directly related to earning that income. The rules vary depending on your business structure and the nature of each expense.
You can claim expenses involved with running your business but you cant claim private or domestic expenses, such as childcare fees. If you do have an expense that is for both personal and business use of an asset (such as a car, or home office), you can only claim the business portion. You can claim these deductions in your business’s annual tax return or, if you’re a sole trader, in your personal tax return.
When is an expense incurred?
Generally, you can claim a deduction for a purchase or an expense in the same year you receive the invoice for it. Most small businesses use the cash basis method of accounting and claim deductions in the income year they pay the expense.
When an expense is incurred for tax purposes will depend on the accounting system you use. Different rules apply for pre-paid expenses, or items you pay for in advance.
Expenses you can claim in the same year
As a guide, operating expenses for the everyday running of your business such as office stationery, wages and rent of the business premises are called revenue expenses and can usually be claimed in the year you pay for them.
Expenses you can claim over time
Assets that have a longer life such as vehicles, furniture or equipment are called capital expenses and can be claimed over time. You can’t claim the total cost of a capital asset in the first year. Instead, you claim an amount for the decline in value, or depreciation, of the asset each year over a number of years.
However, if in your small business you paid less than $6,500 for the asset, you can claim the full amount in the year you incurred the expense.
It’s important to meet all of your tax compliance obligations, if you’re falling behind and need help give us a call or email here.
You can also have a look at the ATO website which has all the info you need to meet your tax and reporting obligations.
The next post in our Small Business Bookkeeping Explained series looks at the benefits and disadvantages of GST for your small business.
This article was written by gabi