When operating a small business, it’s essential that you know the ins and outs of your tax requirements. However, no matter how often people tell you how important they are, paying taxes is almost always a challenge for small business owners. When not done correctly, you might be met with fines and penalties from the Australian Taxation Office (ATO), so it’s incredibly important to get them right!
One saving grace is that you can deduct tax from several assets purchased, letting you save money on your business expenses as much as possible to lower the burden of tax payments. Today we’re going to be looking at possible tax deductions for small businesses that you might be able to benefit from.
What Are Small Business Tax Deductions?
Every business owner will need to file a tax return, but how you pay for this will depend on how your business is structured. Here are the possible ways your small business might be operating:
- Sole traders are individuals running their businesses, and this is the cheapest and easiest way of running a business (according to the ATO).
- Companies are separate legal entities with their own tax and superannuation obligations, and they’re run by directors while being owned by shareholders.
- Partnerships are groups or associations of people who run businesses together to share the income and losses between themselves.
- Trusts are obligations imposed on people or other entities to hold and manage property for the benefit of beneficiaries.
Depending on how your business is structured, you’ll have different legal requirements in regard to tax. The ATO outlines different tax implications for each structure, so make sure you know what’s expected of you.
What Can I Deduct From My Expenses?
The ATO allows you to claim tax deductions on most expenses that come from running your business, provided that they’re directly related to earning a tax assessable income. These costs might include wages, marketing efforts, and finance costs.
To be able to claim tax deductions, you need to make sure they’re for the business and not private. If they’re classified as both business and private expenses, you’ll only be able to claim the business portion.
You might also be able to claim entertainment expenses (except for those you offer as fringe benefits), traffic fines, and domestic expenses such as childcare fees.
8 Small Business Tax Deductions You Should Know About
1. Workers’ Salaries, Wages, and Super Contributions
Businesses can often claim tax deductions for the salaries and wages of their employees, along with the superannuation contributions they’re required to pay for each of them. You can’t claim these for yourselves if you’re a sole trader or partner, but companies and trusts can claim business tax deductions on wages paid to employees and owners who pay themselves a salary. You need to make sure you’re paying super contributions on time to qualify for reductions on these, as accurate records are essential when wanting to benefit from tax deductions on wages and contributions.
2. Business Travel Expenses
As long as the travel you’re paying for is for business purposes, you can claim a deduction on all expenses including airfare, accommodation, and meals. If you’re a sole trader or partner, you should keep a travel diary for trips lasting more than six consecutive nights. This diary can help you justify the claims you’re making to prevent not being able to prove the expenses were for business purposes.
3. Home-based Business
When running your business from home, you might be able to claim tax deductions on expenses such as utilities, local travel if purchased for business expenses, and even rent. Home-based businesses are those that list your home as the primary place of business, with a dedicated space for business activities.
4. Digital Product Expenses
Businesses can claim tax deductions for any digital products they’ve bought, including both operating expenses (like internet services) and capital expenses (such as software purchases). Operating expenses can be deducted in the year they occur, while capital expenses are typically deducted over time as the products depreciate in value. If a digital product is used for both business and personal use, you’ll only be able to claim for the business portion of the expenses. For example, if you bought a laptop for both home and business use, you’d only be able to claim on the time you use it at work.
5. Repairs, Maintenance and Replacement Expenses
You can claim expenses related to repairs and maintenance of business assets, like machinery and premises, as long as they’re not capital expenses. These deductions apply to expenses that restore an asset’s functionality without changing its character. However, substantial improvements or initial repairs after purchase are considered capital expenses and cannot be deducted immediately. Businesses can also claim deductions over time for capital works, such as building extensions or structural improvements, used to generate income.
6. Motor Vehicle Expenses
You can also claim tax deductions for vehicle-related expenses, including fuel, repairs, depreciation, insurance, and loan interest if the vehicle is used for business purposes. If a vehicle is used for both business and personal use, you can keep note of how much of its usage has been for business purposes so you can claim this percentage. You might want to keep a logbook or a diary to make sure you can prove all the time you’ve claimed was used for the business. Without proof, you might not be able to claim a deduction on tax as the ATO has no way if you were truly using the car for business or private use.
7. Other Operating Expenses
Most operating expenses required in running a business can be claimed as tax deductions in the same year that they occur. These expenses include purchases of stock, employee wages and super, rent, utilities, and costs related to business premises. Other deductible expenses cover protective clothing, travel, and fees paid to tax agents or bookkeepers. Accurate record-keeping is essential to make sure all eligible expenses are properly claimed, maximising the deductions your business can receive while remaining compliant with the ATO’s tax regulations.
8. Depreciating Assets and Other Capital Expenses
Tax deductions can also be claimed for depreciating assets like machinery, vehicles, and computers, reflecting their lesser value over time. Some businesses may also qualify for immediate or accelerated deductions through tax incentives, but this isn’t always the case. Depreciating assets can include items brought into the business or purchased to generate income. Again, you need to make sure you have your records all up to date to prevent your claims from being rejected due to lack of proof.
Final Thoughts
The ATO allows you to plan your taxes in such a way that you can pay as little as possible, as long as you’re abiding by the rules they’ve set out and can prove that your expenses were for business purposes only. Your tax deductions will often differ depending on how your business is run, so make sure you know whether you’re a sole trader, partner, company or trust. Remember that most business expenses can be claimed for deductions, so make sure you keep your receipts and use a logbook for intangible purchases!
Book A Free Strategy Meeting With A Business Accountant Today
Small business owners have so much on their plates already that they can easily forget to check for potential tax deductions. This will leave you paying more than necessary, which can negatively impact your cash flow and take money away from improving your business. When you’re worried about not getting the best price on your taxes, we highly recommend getting in touch with us. We offer free strategy meetings at Walker Hill, so why not book one today to discuss your options and see how we can start saving you money?
