THE PAPER TRAIL: Tax deductions that every small business needs to remember

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The point of any business according to business development specialist Mike Milward is to “do the business, invoice the business, and then collect the money for doing the business.” It’s this simple focus on what is ultimately the fundamental building blocks of any successful business enterprise that Milward highlights when he’s working with his clients to improve their performance and long-term sustainability.

But you can only do that, Milward says, if the things that are fundamental to your business, but often distractions from your core operations, are dealt with so that you can focus on building, doing and earning revenue from your business.

Milward says small business clients often get distracted around tax time from their core operations because they haven’t planned their tax affairs properly or indeed efficiently.

So we asked Mark Chapman, H&R Block’s Director of Tax Communications, what he thought the keys to small businesses staying on top of their tax responsibilities were.

Chapman agreed with Milward and said that even though the burden of complying with the tax laws can often seem onerous that prior preparation is where it all begins.

“It’s essential to have good accounting and tax advice. Whether you’re starting out in business and want to know the best structure to use, looking to retire and want to know how to minimise your tax on exit or just want to know what you can claim on a regular basis as part of your trading expenses,” you need to talk to an expert he said.

Chapman walked Business Insider through that foreign land known as deductions. That’s the expenses you incur when you are seeking to make “assessable” income. Assesable for the tax man to then charge you tax that is.

Chapman said many business owners blur the line between themselves and their business and often come afoul of the tax man for claiming expenses they shouldn’t or aren’t allowed to claim. But, he added that a surprising number of businesses also miss out on deductions they could have claimed. “In reality there are legitimate, not-to-be-forgotten deductions that almost every business can take advantage of,” he said.

Here is his list of “other” deductions businesses can claim. Don’t forget though, these are deductions from income, which reduces the amount of tax you pay by reducing that income. They are not dollar for dollar deductions from your businesses tax bill.

Advertising and sponsorship
Costs to push your brand and garner publicity for your business are deductible and can be claimed, as can advertising or sponsorship to sell ‘trading stock’ and to hire staff. Take care to ensure that the costs incurred do not fall within the definition of ‘entertainment’, which is not usually deductible.

Bad debts
A debt that is unpaid and deemed to be a ‘bad’ debt is an allowable deduction as long as it was included as assessable income in the present or even a previous income year, and that it is written off as bad (uncollectable) in the same year that a deduction is claimed.

Borrowed money
Expenses incurred in order to get the borrowed funds can be claimed as a deduction, the proviso being that the money must be used to produce assessable income. These expenses can include legal costs, registration fees, valuation costs, fees to guarantee an overdraft and any commissions paid. But you may have to spread the deductions over more than one year, depending on the extent of the expenses, to cover for example the period of the loan. These deductions are quite separate from the interest actually incurred on the borrowed funds, which is also deductible if the borrowed money is used to produce income.

Business travel
You need to record and document all particulars, but travel for business purposes can usually be claimed. So keep all receipts and your itinerary or diary, and of course airline tickets. Note the nature of the travel, its purpose, and where, when and for how long (and look out for any personal activities that are mixed in as these expenses are non-deductible).

Car expense deductions
You can claim a full deduction for any expenses your company incurs while running a vehicle, either leased or owned, provided the vehicle is used only for business purposes. If your business operates as a sole trader or partnership, you can claim certain proportions of deductions for vehicle expenses, but they are subject to substantiation rules.

Fringe benefits
You can generally claim a deduction for any costs involved with providing a fringe benefit to an employee.

Home work claims
If your work is done from home, or partly home-based, you can usually claim deductions for expenses such as interest, telephone, insurance and a portion of running expenses like heating, lighting or cleaning.

Workers compensation insurance premiums are deductible, as are insurance costs for fire, business-use cars, public liability, theft and loss of profits.

Plant and equipment (depreciating assets)
Larger items like cars or even buildings can be claimed over time as depreciating assets. And you may also be able to claim (over a five year period) certain capital costs in setting up or ceasing a business, as long as an outright deduction is not able to be claimed for that expenditure.

Repairs, replacement, maintenance
A deduction is available for the upkeep of machinery, tools or premises used to produce assessable income (provided they are not ‘capital’ costs). These deductions include things like painting, plumbing and electrical maintenance, upkeep to windows and fences, guttering and machinery maintenance. Generally it means fixing defects, not totally replacing an item, and does not include improvements or work done immediately after acquiring an asset.

Superannuation contributions
You can claim a deduction for a contribution made to your own super fund if self-employed, although care must be exercised if you also have some earnings from employment upon which super contributions have been paid by the employer. Contributions to an employee’s fund should also be deductible. Employers legally have to contribute to employees’ super anyway under the superannuation guarantee laws.

Salary and wages
Operating as a trust or a company means you can claim a deduction for salary paid to employees or to yourself provided the salary is in respect of duties connected with the business. Partnerships can’t claim for salary paid to a partner, but a deduction is available for salary paid to other employees. Sole traders can’t claim for salary paid to themselves (and you can’t claim for amounts taken from the business for private purposes).

Tax management expenses
Managing your business tax affairs can cost, and you can claim these as deductions. This includes paying a bookkeeper, having a tax agent prepare and lodge tax returns and activity statements, paying a subscription to an organisation like Taxpayers Australia, attending to a tax audit or the costs of appealing or objecting to an assessment.

For a telephone you use for business only, you can claim for calls and rental, but not installation. If the phone is used for both business and private calls, you’re able to claim all business calls and a proportional part of the rental. An itemised phone account will guide this, but you can also base the claim on using a representative four-week period to get an average rate for the whole year.

Losses incurred by theft or stealing by an employee may be allowable deductions.

And of course, for the next few years the Federal Government is allowing small business to take advantage of its instant asset write-off on any asset purchasing costing less than $20,000. For the 2014/15 tax year that window has passed but if you are going to need new plant and equipment in the year ahead you’ll be able to deduct that from this year’s income.

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