The end of the financial year is fast approaching and small businesses need to get their tax affairs in order.
Tax time takes it out of the best of us. A small saving grace is the general rule that you can claim deductions for any expense your business incurs while generating its income. Many of these deductions are straightforward – rent, materials, wages, supplies – but here are five you might not have heard of:
Interest: Don’t overlook what you can deduct
You can deduct any interest on money your business borrows, including interest paid on business loans, overdrafts and other finance facilities. This might sound obvious, but there are other interest expenses you can deduct that can easily be overlooked.
Firstly, any interest that is accrued on a business loan but not paid by June 30 is potentially deductible.
Secondly, many small business-owners fund their business through personal loans or with their personal credit card. And because the interest costs aren’t being incurred by the business itself, but by the business-owner, you can claim a deduction on the interest in your own personal income tax.
Depreciation: Take advantage of the $6,500 cap
Small businesses shouldn’t forget to claim for depreciation – getting a deduction for the loss of value and wear and tear on the business’ assets.
Assets usually have to be depreciated bit by bit over several years, but special rules for SMEs mean that they can get an immediate tax write off for any asset with a value of up to $6,500. For example, if your business bought a $4,000 computer in the current tax year, the business could claim an immediate 100 per cent tax deduction when you do your tax return.
The federal government has signalled it wants to drop the limit to $1,000, backdating the change to 1 January 2014. This denies SMEs to take advantage of this concession before it goes out the window (although it remains to be seen if this change will be passed by the Senate). Nonetheless you can, at the very least, take advantage of the $6,500 cap for assets purchased before 31 December 2013.
Motor vehicles: Drive a better deal with the tax man
There are also generous depreciation concessions for small businesses when they buy motor vehicles.
SMEs can depreciate cars, trucks or vans and so on more quickly than other businesses. They receive 100 per cent deduction on the first $5,000 cost of the vehicle and can them depreciate the rest at 15 per cent in the year they bought it. So a $14,000 car would attract a tax deduction of $6,350 in the year of purchase. (If the vehicle cost less than $6,500, the whole amount can be claimed as an immediate deduction under the instant asset write-off provisions outlined above.)
But, as with the general depreciation rule, the government wants to remove these concessions and backdate them to 1 January. If this happens the initial deduction on a $14,000 car would drop to $4,200.
Trading stock: Profit from your losses
Tax time is a good opportunity to do a stocktake to see if you qualify for any deductions on your trading stock – anything you produce, manufacture, purchase for manufacture or sell for your business.
You can write off any lost, damaged or obsolete stock for a tax deduction. If your stock level changes by more than $5,000, you must take into account the change in value of your trading stock when you work out your taxable income for the year. If the value of the trading stock is higher at the end of the year than at the beginning, then the rise counts as part of your taxable income. But if your stock is worth less you will qualify for a deduction.
There are three different methods of valuing stock: the price you bought it for; its current selling value; and its replacement value. You can choose which you use for which piece of stock, giving you the opportunity to maximise your deductions.
Bad debts: There is some good news
It’s always bad news for a small business when debtors fail to pay for the goods or services you’ve sold them. But at least there’s a small silver lining – you can claim a tax deduction for the bad debt.
A bad debt is any debt which has been outstanding for 12 months or more and which you have made a reasonable effort to recover. It pays to go back through your outstanding invoices to find bad debts and write them off before the tax year on June 30.
Also, if you calculate your GST on an accrual basis, don’t forget to claim a refund for the GST you paid to the Australian Tax Office when you issued the original invoice.
So there you have it: five small business tax deductions to start looking at before the end of the financial year.
About the Author
Chris Ridd is managing director of Xero, an online accounting software provider which helps small businesses get their financial affairs in order.