Expense List for Business Tax Deductibles
It is important to consult with a tax professional before setting up a business or company of any size. This will allow you to be aware of all your liabilities as well as any expenses you can claim. Company tax deductible expenses will generally be higher than the expenses of a small business as a company is more expensive to set up. Being familiar with the different types of business structures will support in decision making when it comes to your own business structure.
Most expenses incurred from running your business can be claimed as a tax deduction when you submit your annual tax return. These expenses need to be directly related to the business’s income. All the relevant information you need can be provided by your tax professional.
The formula used by the Australian Tax Office (ATO) to calculate your taxable income is:
- Assessable income – tax deductions = taxable income
- Most of the income you receive from running your business is ‘assessable income’ which is income subjected to tax.
You need to keep accurate records to verify what you are claiming if you plan to claim tax deductions for your business. This will reduce the tax you will be required to pay. Your records must clearly explain each transaction and according to the law must be:
- in English, or in a form that we can readily access and convert into English
- in writing, either on paper or electronically
- kept for five years (although some records need to be kept longer).
Essential steps for claiming your tax deductions
The type of business structure you have will determine how you claim your business expenses.
If you are a:
- Sole trader – you claim the business deductions within your individual tax return.
- Partnership – you can claim the business deductions within your partnership tax return.
- Trust – you claim the business deductions within your trust tax return.
- Company – you claim the business deductions within your company tax return.
When your business tax deductions must be claimed
Each expense will be either an operating expense or a capital expense, and these are claimed at different internals.
- operating expenses (such as office stationery, rent for premises, purchase of stock and staff wages) must be claimed in the year you incur them.
- capital expenses (such as machinery, buildings, and equipment) are claimed over a longer period. Your tax adviser will help to determine the length of this period.
What qualifies as a claim
To be able to claim a business expense the following applies:
- The expense must relate wholly to your business and not to any private use.
- If the expense you are claiming is for a mixture of business and private use, you can only claim the portion that pertains to business use.
- You must have records to prove the expense is valid.
For example, if you buy a computer or device and only use it for your business, you can claim 100% of the full purchase price as a business expense. However, if you only use the computer or device 50% of the time for your business and 50% of the time for private use, you can claim 50% of the amount as an expense.
Note: You cannot claim the GST component of the purchase price as an expense if you are able to claim it as a GST credit on your business activity statement.
Employee salaries and super contributions
Business owners can generally claim tax deductions for:
- the salaries and wages paid to employees.
- super contributions you make to a complying super fund, a retirement savings account (RSA) for your employees, and for certain contractors.
The expense of salaries and wages is a type of operating expense which is sometimes called a working or revenue expense.
Repairs, maintenance, and replacement expenses
Expenses that relate to repairs, maintenance or replacement of machinery, tools, or your business premises (as long as the expenses are not capital expenses) can be claimed as a tax deduction.
A capital expense is money spent to purchase assets such as plant and equipment.
Business Travel Expenses
If you or your employee are traveling for business purposes, you can claim tax deductions for expenses incurred.
Keeping a travel diary is:
- compulsory for sole traders and partners in a partnership to record overnight business travel expenses.
- highly recommended for everyone else.
Motor Vehicle Expenses
You can claim for motor vehicles provided to an employee or an associate as part of their terms of employment if you operate your business as a company or trust.
For tax purposes, cars are defined as motor vehicles (including four-wheel drives) and designed to carry:
- a load that is less than one tonne and;
- fewer than nine passengers.
Other vehicles include:
- vehicles designed to carry either –
- one tonne or more (such as a utility truck or panel van)
- nine passengers or more (such as a minivan).
The business must own every motor vehicle in use or lease it under a finance agreement.
Vehicle expenses that can be claimed are:
- fuel and oil
- repairs and servicing
- interest on a motor vehicle loan
- lease payments
- insurance cover premiums
- depreciation (decline in value).
It is important to clearly calculate the percentage you are claiming as business use as you cannot claim the percentage that is for your private use. Errors are often made if a motor vehicle is used for both business and private use.
A logbook, diary or smart phone application is recommended to record the travel–this will help to identify the percentage of business and private use. You can also use the ‘cents per kilometre’ method.
Other operating expenses
Operating expenses are the expenses incurred in the everyday running of your business. It includes office stationery, computer consumables, rent of premises and the purchase of trading stock. The expenses are also called working or revenue expenses.
Most operating expenses can generally be claimed as a tax deduction for the same income year in which you incur them, so ensure accurate and complete records are kept for these expenses as they occur.
Note. If the expenses relate to both business and private use, you can only claim the business portion of these expenses. For example, mobile phone calls.
Depreciating Assets and other Capital Expenses
Businesses can claim tax deductions for capital expenses over a period of time. A capital expense is either:
- the amount you paid for the asset as well as the costs that were accrued transporting and installing it.
- an expense associated with establishing, replacing, or purchasing the business.
Tax deductions for bad debts
Business owners may be able to claim a deduction for income that cannot be recovered from a customer or debtor. This unrecoverable income is also known as a ‘bad debt’.
Home-based business expenses
You may be able to claim expenses if you operate some or all of your business from home. These are the relevant categories for claiming:
- occupancy expenses (such as mortgage interest or rent, council rates, land taxes, house insurance premiums)
- running expenses (such as electricity, phone, decline in value of plant and equipment, furniture and furnishing repairs, cleaning)
- the expenses of motor vehicle trips between your home and other locations if the travel is for business purposes.
With all business expenses you can claim, keeping accurate and up-to-date records is absolutely crucial as this will not only support in the reduction of taxes you pay, but will allow a smoother process when completing your lodgments.
Should you require any additional assistance please don’t hesitate to contact us.
Disclaimer: the information contained in this article is for general information purposes only and in no event will Taxopia or its affiliated entities be held liable for any loss or damage caused through the use of this information. Independent advice is recommended for all individual circumstances. Data and specifications included correct as at May 2021.