List of Business Tax Deductible Expenses
It pays to be aware of all liabilities and any expenses you can claim.
Prior to setting up a business or company, it is recommended to consult with a trusted tax professional. Your trusted adviser will help you to be aware of all the liabilities that might apply to you plus any expenses you can claim.
Due to companies being more expensive to set up, tax deductible expenses for these will generally be higher than those of small businesses. When it comes to establishing your own business structure, being informed of the different types of structures will aid in the decision-making process and support you in setting up your business for success.
When submitting your annual tax return, you will be able to claim most expenses as a tax deduction. This includes all expenses incurred from the running of your business. The expenses need to directly relate to the business’s income. All essential information regarding these expenses can be provided by your tax professional.
The Australian Tax Office (ATO) calculates your taxable income with the formula:
- Assessable income – tax deductions = taxable income
Most of the income received from running your business is ‘assessable income’ which is income subjected to tax.
It is advised to keep accurate records to verify what you are claiming if you plan to claim tax deductions for your business. Keeping accurate and consistent records will help to reduce the tax you will be required to pay. Records must clearly explain each transaction and according to the law must be:
- in English, or in a form that can be readily accessed and converted into English
- in writing, either on paper or electronically
- kept for five years (though some records need to be kept longer).
The essential steps for claiming your tax deductions
How you claim business expenses will depend on the type of business structure you have.
For Example, if you are a:
- Sole trader – business deductions are claimed within your individual tax return.
- Partnership – business deductions are claimed within your partnership tax return.
- Trust – business deductions are claimed within your trust tax return.
- Company – business deductions are claimed within your company tax return.
When business tax deductions must be claimed
Expenses are to be claimed at different intervals. Depending on whether it is an operating expense or a capital expense will determine the time frame.
- Operating expenses (such as office stationery, rent for premises, purchase of stock and staff wages) must be claimed in the year they are incurred.
- Capital expenses (including 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 claim a business expense the following applies:
- The expense must relate entirely to your business and not any private use.
- If the expense being claimed is for a mixture of business and private use, only the portion that pertains to business use can be claimed.
- Records must be kept to prove the expense is valid.
For example, if you buy a computer or device and 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 only 50% of the amount as an expense.
Note: You cannot claim the GST component of the purchase price as an expense if you can claim it as a GST credit on your business activity statement.
Employee salaries and super contributions
Business owners can claim tax deductions for:
- salaries and wages paid to employees.
- super contributions made to a complying super fund, a retirement savings account (RSA) for your employees, and for certain contractors.
Salary and wage expenses are a type of operating expense–sometimes called a working or revenue expense.
Repairs, maintenance, and replacement expenses
Any expense that relates 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 including plant and equipment.
Business Travel Expenses
If you or one of your employees are traveling for business purposes, the expenses can be claimed as tax deductions.
Keeping a travel diary is:
- compulsory for all sole traders and partners in a partnership to record overnight business travel expenses, and;
- highly recommended for everyone else.
Motor Vehicle Expenses
If you operate your business as a company or trust you can claim for motor vehicles provided to an employee or an associate as part of their terms of employment. For tax all purposes, cars are defined as motor vehicles (including four-wheel drives) and designed to carry:
- a load that is less than a tonne and;
- fewer than nine passengers.
Other vehicles can include:
- vehicles designed to carry –
- one tonne or more (such as a utility truck or panel van) or;
- nine passengers or more (such as a minivan).
The business claiming expenses must own every motor vehicle in use or have it leased under a finance agreement.
Vehicle expenses that are able to be claimed are:
- fuel and oil
- repairs and servicing
- lease payments
- insurance cover premiums
- interest on a motor vehicle loan
- depreciation (decline in value).
You must clearly calculate the percentage being claimed as business use as you cannot claim the percentage that is for your private use. Errors can be made if a motor vehicle is used for both business and private use.
To help to identify the percentage of business and private use, a logbook, diary or smart phone application is recommended to record the travel. Another method for claiming motor vehicle expenses is the ‘cents per kilometre’ method.
Other operating expenses
Operating expenses are expenses incurred in the everyday operations of your business. This can include office stationery, computer consumables, rent of premises and purchases of trading stock. These expenses are also called working or revenue expenses.
Most operating expenses can be claimed as a tax deduction for the same income year you incur them, so ensure accurate and complete records are kept for these expenses as they happen.
Note: If 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 can be either:
- the amount you paid for the asset including the costs that were accrued transporting and installing it, or;
- an expense associated with establishing, replacing, or purchasing the business.
Tax deductions for bad debts
Business owners might be able to claim a deduction for income that cannot be recovered from a customer or debtor. Unrecoverable income is also known as a ‘bad debt’.
Home-based business expenses
If you operate some or all of your business from home you may be able to claim expenses related to the running of your space.
These are the relevant categories to consider when claiming:
- occupancy expenses (including mortgage interest or rent, council rates, land taxes, house insurance premiums)
- running expenses (including electricity, phone, decline in value of plant and equipment, furniture and furnishing repairs, cleaning)
- expenses of motor vehicle trips for business purposes between your home and other locations.
Keeping accurate and up-to-date records is crucial with all business expenses, as this will not only support in the reduction of taxes you pay but allow for a smooth process when completing your lodgements and meeting your obligations.
Disclaimer: the information contained in this article is for general information purposes only and in no event will SDP Tax Accountants 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.