Small Business Bookkeeping Explained Part 3: Tax Deductions

Welcome to Part Three of our series that explains simply and in plain english everything that you need to know about small business bookkeeping. This week we’re going to take a closer look at Tax Deductions.

If you haven’t already, take a look at parts one and two of the series, BAS and GST obligations of a small business owner and PAYG, or Pay As You Go Withholding and Instalments.

Tax Deductions for Small Businesses

A tax deduction is an expense to your business that goes directly back into the business that you can claim to reduce your tax bill.

For example, if you run a shoe store and you purchase point of sale software to use within the store, that purchase can be claimed as a deduction against your owing tax at the end of the financial year. 

However if you were to buy something for the business that’s not directly related to earning or falls under private use. For example, if you buy a new outfit to wear to work, you won’t be able to claim it. 

For purchases that can be split between business and private use, such as a mobile phone, you’ll be able to claim tax back on part of that purchase and ongoing service

What You Can Claim as a Tax Deduction for your Business

As you can probably expect from the above (and of the ATO), you can only claim things as a tax deduction that goes directly into running your business. 

What you can claim as a tax deduction: 

  1. An expense for your business, that does not have any private use. 
  2. If you have an expense that is for both private and business use, you’ll only be able to claim a portion of this. 

What you need to remember when making a claim: 

  1. You must keep your records to prove that it is a business expense. 
  2. You can’t buy things just because you can claim them. A brand new laptop each year may not seem reasonable to the ATO and they may reject that deductible. 
  3. You won’t get the full 100% of what you paid back on your taxes. Based on your taxable income, you’ll get a portion of what you spend back. 

One of the key points that we want to push with this article – is that you shouldn’t buy things just because you can write them off on tax. 

It’s great to know that when you’re putting money into your business to make it better, the ATO will acknowledge that and give you a little kickback. But buying things just for the sake of it isn’t a good way to manage your finances. Do you really need an entirely new fitout for your home office this year, or will a new chair be enough to keep you comfortable? 

What Types of Expenses Can You Claim?

As we’ve mentioned, there are some items that you won’t be able to claim based on their category, so to break it down in the types of expenses the ATO has created categories. 

These categories are in place to help you make a more informed decision about what is and isn’t eligible for your tax return. 

  • Motor vehicle expenses
  • Home-based business
  • Business travel expenses
  • Workers’ salaries, wages and super contributions
  • Repairs, maintenance and replacement expenses
  • Other operating expenses
  • Depreciating assets and other capital expenses
  • Carbon sink forest expenses

For most of theses, the basic rule applies that you’ll need to determine the split between business use and private use and only claim for what you use for business purposes. 

Again, these categories drive home the point that you’ll be able to claim tax deductibles on things that are directly related to running your business. The ATO knows that there is a crossover between life and business, and they’re not going to pay for your lifestyle. 

So if you want to claim your cigarettes on tax as ‘stress relief’ it’s not going to fly (and we didn’t make that up, someone has actually tried and failed to get that through!).

How to Claim a Tax Deduction?

When you claim your tax deduction depends on the type of small business you’re running: 

  • Sole Trader: you’ll claim the deductions in your individual tax return in the “Business and Professional Items” section through myTax, or your registered tax agent. 
  • Partnership: you’ll claim the deductions in your partnership tax return 
  • Trust: you’ll claim the deductions in your trust tax return 
  • Company: you’ll claim the deductions in your company tax return

If you’re lodging your tax return yourself, you’ll need to get this in, as always, before October 31 of each year. However if you decide to work with a registered tax agent, you’ll get extra time to submit as they have a facility with the ATO to lodge on behalf of you after this deadline.

Prepare Yourself for EOFY

There’s a lot to understand about claiming the right things as a tax deduction, but at the end of the day, everything falls under the same principle of business vs private use. 

Here are a few tips on what you can do throughout the year to make claiming tax deductions quick and easy: 

  1. Keep track of receipts and put everything into your spreadsheet or bookkeeping software 
  2. If you use a phone or car or business or pleasure – make sure you keep a log of how often it’s used so you can claim for the right percentage as business use  
  3. Don’t go overboard! The ATO knows a sole trader doesn’t need 3 phones to do business! 
  4. Be reasonable – if you have something that’s 100% business use, go ahead and claim it. But don’t submit everything you’ve bought for the house because you work at home. You don’t want to do anything that will set off an alarm bell and get the ATO looking any deeper into your lodgments. 

One of the biggest take-aways that we want you to understand from this, is that tax deductions aren’t a refund. If you don’t need something, don’t buy it!

If you’re still needing more information on claiming tax deductions or you just don’t want the hassle, call us today on 1300 900 938 or get in touch online for a confidential and completely free chat about your books.

Join us again for Part 4 of our Small Business Bookkeeping Explained where we tackle choosing the right bookkeeping software platform for your business. 

Or, if you haven’t read Part 1 or 2 yet, learn all about BAS and GST here or PAYG here.  

Recent Posts