Small Business Tax Deductions – Deduction Rules

The 2020 tax season is still a few months away, but it’s never too early to start preparing all the paperwork for this year’s annual tax return. Keeping abreast of all the various pieces of information you need to compile your tax return is no small feat and staying on top of all the record keeping requirements to satisfy the Australian Tax Office come tax time is a task in of itself. When it comes to small business tax deductions ensuring your business’ paperwork is in order, will not only protect against any future audits, but the financial savings of small business tax deductions 2020 can be substantial. Unsure if your business is paying more tax than it has to? Chances are it is! To find out if there is a small business tax deduction that you could be claiming, get in touch with one of our dedicated business accountants at Taggart and Partners today. Working closely with your business we will conduct a thorough tax planning review that will ensure your business is taking advantage of all the available small business tax deductions, allowances, exclusions and exemptions.

Small Business Tax Deductions 2020

Business tax is payable on business income after allowable small business tax deductions and other operating costs have been removed from gross income. There are three golden rules that the Australian Tax Office sets out for what can and can’t be claimed as a business expense.

The expense must have been for the business and not for private use.
If the expense was for a mix of business and private, you can only claim the portion that is used for your business.
You must have records to prove it.

The onus is and has always been on the business to prove whether expenses are legitimate and failure to do so could result in penalties and fines for failing to meet tax obligations.

There are many potential small business tax deductions 2020 that you can claim depending on the operations of your business, some of which include:

Operating Expenses – Office stationery, utilities, legal and accountancy fees can be claimed in the year that occur.
Motor Vehicle Expenses – Motor vehicle costs including fuel and oil, repairs and servicing, interest on a motor vehicle loan, lease payments, insurance premiums, registration and depreciation can all be claimed.
Workers’ salaries, wages, and super contributions – Staffing costs of employees working for the business which include contractors.
Business Travel expenses – Businesses can claim a deduction for the cost of travel if it is connected to your business.
Repairs and Maintenance – Expenses related to substantially improving business assets, and capital improvements. Such as installing a new ceiling, and repairing a defective air-conditioning unit.
Running your Business from Home – Businesses who operate solely or partially from a home office, can claim a portion of running costs including, utilities, rent, mortgage, interest etcetera.
Capital Works – Deductions can be claimed for costs of constructions, structural improvements or building alterations and can be written off in equal amounts over 5 years.
Depreciation of Assets – The cost of capital acquisitions can be claimed as a small business tax deduction over a certain number of years depending on the effective life of the asset. Asset depreciation is often missed by many business owners, but if correctly calculated can offer significant tax savings year on year.

Small Business Asset Write Off 2020

Businesses can claim small business tax deductions for capital expenses deductible over a period of time. Some examples of depreciating assets include machinery and equipment, motor vehicles, furniture, carpet and curtains, and computers. A capital expense usually falls into two categories:

The expense of a depreciating asset – this includes the amount you paid for the asset and the expenses from transporting and installing it.
An expense associated with improving your business – Capital acquisitions that have been purchased to replace, enlarge or improve your business can also be depreciated.

Capital expenses depreciate based on effective life of an asset – or how long the asset will reasonably be used to produce income. There are general guidelines that are followed by tax accountants for differing types of assets, but the Taxation Office will generally consult directly will owners, sellers, manufacturers and users of assets in determining an asset’s effective life. Once the effective life has been calculated a percentage of the total acquisition cost can then be claimed as a small business tax deduction per financial year until the asset has been fully depreciated. Depreciation is often a difficult small business tax deduction for most businesses to work out on their own, but the financial savings can be considerable to businesses that effectively claim depreciation costs.

The Simplified Small Business Asset Write Off Depreciation Method

Depreciation assets has historically been done over several years based on the effective life of the assets. However, the Australia Taxation Office has a simplified method that businesses with an aggregate turnover of less than $10 million from 1^st July 2016 onwards, and $2 million in previous income years can take advantage of. For a limited time until the 1^st July 2020 the threshold has been significantly increased from the previous limit of $1000 allowing businesses to instantly deduct the business portion of depreciating assets up to much higher amounts:

Assets purchased between 7:30PM (AEST) on 12 May 2015 until 28 January 2019 – Assets costing less than $20,000.
Assets purchased from 29^th January until before &:30pm (AEDT) 2 April 2019 – Assets costing less than $25,000.
Assets purchased from 7:30pm (AEDT) on 2 April 2019 until June 30, 2020 – Assets costing less than $30,000.

On the 1^st July 2020, the threshold for instant asset write-off will revert back to $1000. Taking advantage of the increase in instant asset write-off for this financial year could significantly reduce the taxable income for your business this year. As an example, if your business installed 20 new workstations and computer terminals for employees this year costing $3,000 per workstation/computer set ($60,000 in total), your business would be eligible for a $60,000 deduction on this year’s income. Under normal depreciation rules given five-year effective life, depreciation would normally come to $12,500 per year for five years which would result in much higher gross profit. Until July 1^st, 2020, your business may be eligible to instantly write off the entire cost in a single financial year, get in touch with specialist small business accountant for more details today.

Small Business Asset Write off Pooling

Small businesses also have the option to pool the business portion of most higher cost assets (assets with a cost equal to or higher than the relevant instant asset-write off limit) and claim:

A 15% deduction in the year you start to use the assets
A 30% deduction each year after the first year.
Deduct the balance of the small business pool at the end of the income year if the asset is less than the instant asset write-off threshold.

Taking advantage of the simplified small business asset write off this financial year could significantly reduce your business’ tax burden. For more information regarding the Australian Tax Office’s simplified depreciation system or for professional tax planning advice and reduction, get in touch with a dedicated small business accountant from Taggart and Partners today to see how effective tax planning can achieve lasting tax minimisation for your business.

*** This publication is for guidance only, and professional advice should be obtained before acting on any information contained herein. Neither the publishers nor the distributors can accept any responsibility for loss occasioned to any person as a result of action taken or refrained from in consequence of the contents of this publication. Publication date April 2018