11 Business Expenses You Might Be Overlooking
Tax time doesn’t have to be stressful. Knowing which Business Expenses to claim as tax deductions in this financial year’s tax return can put more cash in your back pocket. Most Australians are punting on getting money back from the Australian Taxation Office (ATO) when they prepare and lodge their annual tax return.
You’re entitled to claim deductions for expenses that relate directly to earning your income. Be aware that whether you can claim will depend on your circumstances, including if you operate your business from home.
To help, we’ve compiled a list of Business Expenses you could claim on your taxable income. Employers can also claim deductions for super contributions made on behalf of employees.
Additionally, you can claim other expenses such as subscriptions and professional association fees for tax deductions.
Introduction to Business Expenses
Running a business involves various costs, and understanding these business expenses can help you claim tax deductions to reduce your taxable income. Business expenses are broadly categorised into operating expenses and capital expenses.
Operating expenses are the everyday costs of running your business, such as rent, utilities, and employee salaries. These expenses are typically claimed as an immediate deduction, meaning you can deduct the full amount in the year they are incurred. On the other hand, capital expenses are costs associated with acquiring or improving long-term assets like equipment or property. These expenses are claimed over the life of the asset, spreading the deduction across multiple years.
Small businesses can claim tax deductions on a wide range of expenses, including business-related travel, education, and training costs. To claim these business expenses, it’s crucial to keep accurate records, including receipts, invoices, and bank statements. The Australian Taxation Office (ATO) provides guidelines on what expenses are deductible for small businesses, so consulting with a registered tax agent or accountant can help ensure you stay compliant.
By claiming business expenses, small businesses can reduce their taxable income and increase their cash flow. This extra cash can be reinvested into the business or used to pay off debts, providing a significant financial benefit.
1. Claiming Home Office Equipment
Given that COVID-19 has driven so many of us to work remotely it’s likely you’ve invested in some new home office equipment. When claiming home based business expenses, you can deduct costs such as utilities and occupancy costs. So that fancy new desk or second monitor is all claimable. However, any costs related to personal use must be excluded from tax deductions.
2. Claiming Mobile Phone Calls
If you’re making calls that relate to your work, you can generally claim these as a tax deduction. Expenses related to digital products can also be categorised into operating and capital expenses, depending on their use and nature. Other possible claimable expenses include internet connection costs for your home office, too. It is important to ensure that these expenses are for business purposes when claiming deductions.
3. Office Supplies & Equipment
For small business owners, specialist equipment can be a legitimate expense. Computers can be claimed as capital assets for immediate deductions, emphasising their role in both operating and capital expenses for businesses. For example, if you’re in hospitality or retail and invest in new Point of Sale equipment, it could be deducted. And while stationery and workspace supplies are things you probably think to deduct, remember other items like milk for the work kitchen are also possible deductions. Any items or services purchased for business purposes can typically be considered tax-deductible.
4. Business Travel Expenses
If you’ve had to travel for work, you could claim the costs flights, accommodation, meals, taxis and so on but again, only if you haven’t been reimbursed through your business or by your employer. Sole traders or partners are required to maintain a travel diary to record business-related overnight travel expenses. Also know this: if you tacked a few days onto your business trip, that section of the trip can’t be deducted. Only the business portion of travel expenses can be claimed for deductions.
5. Handbags & Accessories
If you use a bag for work purposes, such as carrying iPads, phones, calculators or anything else you need to run a business or do your job, you could claim a tax deduction for the cost of the bag. The handbag must be directly related to work to qualify for a tax deduction. The handbag needs to be fit for work purposes and qualifies as a work-related expense if it is used for carrying items needed for work.
6. Insurance is a Business Expense
If you pay for insurance premiums against loss of income, those amounts are also potentially tax deductible. Interest on money borrowed is also a deductible expense under other operating expenses. Bear in mind that doesn’t include life insurance, critical-care insurance or trauma insurance. It also excludes policies paid for out of your superannuation contributions. You may be able to deduct a portion of your home insurance premium. An expense is generally recognised when there is a legal obligation to pay for insurance premiums.
7. Gym Memberships
The ATO takes a hard line around tax deductions relating to personal health and fitness but some people may be entitled to claim gym memberships, particularly if you require a level of fitness above the norm. Consulting with a tax professional can help you navigate tax deductions effectively, ensuring you maximise the benefits of eligible deductions.
Expenses must be claimed in the financial year in which they were incurred.
8. Your Accounting Fees Are Business Expenses
Individuals and businesses can potentially claim accounting costs. Services related to accounting, such as expenses incurred for goods or services to be received in future periods, can be claimed as deductible expenses.
It is important to adhere to payment obligations when claiming accounting costs to ensure compliance with tax regulations.
9. Claiming Membership Fees
If you’re part of a professional organisation, such as a union or industry body that relates to your profession and you pay fees, you could claim these fees as a tax deduction. Other operating expenses that can be claimed include legal fees and professional association fees.
You generally incur an expense when a legal obligation to pay arises.
10. Car Expenses
If you’re required to use your own car for work reasons, you can usually claim fuel and maintenance as a tax deduction. Motor vehicles used for business purposes can have various deductible expenses, including fuel, maintenance, and depreciation. There are two ways to calculate this deduction you either use a logbook for at least 12 weeks, or you can claim cents per kilometre. Be careful the ATO put a spotlight on car-related expenses last year. Also, bear in mind you can’t claim the trip to and from work, and it’s crucial to distinguish between business and private use of motor vehicles when claiming deductions.
11. Rental Property Expenses
Most people who own a rental property know they can claim deductions but some of these are overlooked. Claiming deductions for rental property expenses can directly affect your assessable income, reducing the amount of taxable income.
Tax deductions you could claim are things like bank fees, insurance, pest control, maintenance and repairs, letting fees, marketing costs, security fees, gardening and lawn mowing costs and bookkeeping fees.
Remember, too, that you’re expected to keep files for five years from the time you lodge your tax return. Generating revenue and claiming eligible expenses are crucial to reducing your taxable income.
Depreciation and Assets
Depreciation is a key aspect of small business tax deductions, allowing you to claim the decline in value of an asset over its effective life. Depreciating assets can include equipment, vehicles, and property, and the ATO provides guidelines on the effective life of each asset.
Small businesses can claim depreciation on assets using either the prime cost method or the diminishing value method. The prime cost method involves claiming a fixed percentage of the asset’s cost each year, while the diminishing value method involves claiming a percentage of the asset’s declining value. Both methods have their advantages, and the choice depends on your business’s specific circumstances.
Capital assets, such as property and equipment, can be depreciated over their effective life, and the depreciation can be claimed as a tax deduction. Additionally, small businesses can claim immediate deductions for certain capital expenses, such as assets costing less than $20,000.
Accurate record-keeping of asset purchases and depreciation is essential to ensure compliance with ATO regulations. By claiming depreciation and asset deductions, small businesses can reduce their taxable income and increase their cash flow, providing more funds to invest back into the business.
