Top Small Business Tax Deductions in Australia

The tax season can be a difficult time for all small business owners. The thought of handing over a significant sum of money to the government is not an appealing one. Because of this, the tax deductions available to owners of small businesses are quite important. These deductions will demand you maintain a tax-aware mindset throughout the entire year. Keeping detailed records of your day-to-day expenditures can significantly reduce costs during tax season. In this article, we will be exploring deductions every business must take seriously and never miss. 

What is a Tax Deduction?

Tax deductions refer to the expenses you can subtract from your taxable income. This, in turn, reduces the taxes you are required to pay. The Tax Cuts and Jobs Act of 2017 significantly changed the tax deductions available to individuals. Many of the most commonly used deductions were either eliminated or had their maximum amount reduced.

Small business owners have a different way of determining their taxable income than individuals. They calculate their taxable income by subtracting the business costs from their gross receipts. Keeping track of your business expenses is important if you are a small business owner, self-employed, or earning money from an LLC. This is because you can deduct these expenses from your income, which can help you save money and improve your financial success.

Regarding tax deductions small businesses can claim, some expenses are straightforward, like office rent, equipment, salaries, and insurance. However, other expenses require careful record-keeping and receipts. Despite the extra effort, it's worth it to keep track of these expenses because they can be deducted from your taxes.

Top Tax Deductions Small Business Owners Can Claim

The goal of a business owner is to make profit and grow the company. However, paying taxes seems like another stressful task most businesses detest. The good news is you can make some money while doing the right thing. Below are the top ten tax deductions you should never miss as a business owner. 

1. Home office

Have you set up a home office in an extra room in your house or apartment? Good news! You can probably claim some costs if you run a business out of your home. Whether you work from home or not, you can still claim office costs. If you use your home office for business purposes, you may be able to get some tax breaks.

• Utility costs

You can subtract a portion of your utility costs based on how much your home is used as a home office. This means that some of the money you spend on water and energy for your home can be deducted from your business taxes.

• Mortgage interest

The same rule holds for debt interest. This lets them write off a certain amount of their mortgage interest based on how much their home is used as a home office.

• The phone and the internet

You can deduct the cost if your business needs phone and internet service and only uses it for work. But let's say you use the same service for both work and pleasure. In that case, you can only deduct the amount of use that is for work.

• Real estate taxes

The business part of your real estate taxes is based on how much your home is used as a home office. You can write off the business part of your real estate taxes.

2. Business development and training

When it comes to training, including workshops and business events you've attended, as well as online courses and programs relevant to your industry, if you belong to a specialised group that helps you manage your business more effectively, it is also a legal deduction. Employee training and upskilling costs should also be included. Business book subscriptions, such as Audible, can be claimed, as can hard copy books and resources.

3. Capital gains tax reductions

As a small firm with a turnover of less than $2 million, you may be entitled to numerous CGT concessions on selling "active business assets," tangible and intangible, according to the tax laws. Capital gains tax is a complex field with variable eligibility conditions for several types of small business CGT reductions.

4. Bad debt write-off

Bad debt refers to unrecoverable income from credit sales to clients or debtors. After making reasonable commercial attempts, the small business owner must determine beyond a reasonable doubt that the debt is bad. Evidence of conversations with debtors seeking payment and a record of phone and email reminder reminders may be sufficient evidence of commercial attempts. When a business writes off a legitimate bad debt, it can claim it as a business expense on its tax return.

5. Health insurance premiums

As a business owner, you are accountable for charges often covered by an employer. Some of these expenses may assist in lowering your tax liability. Health and dental insurance premiums for you, your spouse, and your dependents are fully deductible if you declare a net profit on the form on which a self-employed individual reports income and expenses. However, rather than being claimed as an itemised deduction, it is treated as an income adjustment that reduces your taxable income, potentially resulting in an even lower tax bill. If a small business owner provides health insurance to their employees, the premiums paid are deductible business expenses.

6. Retirement plan contributions

Saving for retirement is beneficial to your future and can assist in minimising taxes owed. Contributions to an IRA, SEP IRA, SIMPLE IRA, and qualifying retirement plans, such as a 401(k), reduce the income reported on Form 1040, Schedule 1 by a self-employed business owner. The deduction amount is determined by whether you or your spouse participate in other employer-sponsored retirement plans. The deduction cannot exceed your earned or the plan's maximum savings amount.

7. Depreciable assets

Most businesses will have purchased assets that qualify for small business deductions. All deductible equipment includes computers, printers, bookshelves, and desks. The restrictions regarding how much you can claim as an immediate write-off for your business changed gradually during 2020. You can claim $150,000 as a business tax deduction for any asset installed or ready to use between March 12, 2020 and December 31, 2020 (up from $30,000 previously). A distinct rule applies to commercial vehicles that carry less than one tonne or less than nine passengers (most standard-sized cars). The business use will determine the amount you can claim, but you cannot claim additional depreciation deductions for cars exceeding the car limit. Most other business assets over $150,000 can be deducted over time by aggregating costs into a small business pool and claiming a certain amount each year.

8. Prepaid costs

Prepayment of business-related expenses can be an effective approach to lower income tax for the current fiscal year. Paying for business expenses such as insurance premiums, mortgage interest, utility bills, or business-related subscriptions before June 30 increases the amount of permissible tax deductions for the year.

However, remember that if you claim such business costs this year, you will not be able to claim them again the next year, so they may impact your tax liability in the coming fiscal year. It is prudent to weigh the tax benefit of prepaying these expenses against the negative impact on firm cash flow.

9. Old goods

Have some aging stock? Notice no sales on any out-of-fashion stock since the previous income year and foresaw none in the current and future years? These could be symptoms of obsolescence that can be used as a tax deduction for the value write-off. Special attention must be paid while valuing outmoded stock. Professional assistance may be required about the applicability of ATO requirements.

10. Business vehicle deduction  

Although the Tax Cuts and Jobs Act abolished the possibility of claiming mileage for personally itemised deductions, the Tax Act nevertheless allows business owners to deduct the costs associated with using their vehicles for work-related purposes. You don't need to own a conventional company to do this.

There are two different approaches to computing the deduction. The first method is to tally up the real costs of maintenance, fuel, and any other associated expenses. The second method is to tally up the miles travelled for business purposes and deduct a sum based on a standard mileage rate. The mileage technique is more convenient for business owners. However, keeping track of their real expenses could result in a larger tax benefit. It is essential to maintain thorough records no matter the outcome. Check out The ABCs of Small Business Financing: A Guide for Entrepreneurs.

Conclusion

Remember that the more deductions you claim, the less income will be subject to taxation. And remember, the less income you have that is subject to taxation, the less money you will owe. Got it? Great! But look, all of this becomes complicated quickly, especially if you run a small business with employees. The last thing you want to do is lose out on deductions that may save you hundreds or even thousands of dollars on your taxes or, even worse, make some mistakes that put you in a precarious position with the ATO. You should consult a tax expert to ensure you have everything in order before filing your taxes.

We at The Kalculators completely understand if all of this tax-related information is making your head hurt. We know you'd rather spend more time concentrating on your company. To ensure you can get the most out of these tax deductions, contact The Kalculators in Australia. Our tax experts alleviate the anxiety associated with tax season for every small business. We assist you in claiming all of the deductions to which you are entitled while also helping you save time. Already, we can hear a difference in the way you are breathing. Let us help!

Frequently Asked Questions

What expenses can I assert without receipts?

The home office deduction can be claimed without the need for receipts by utilising the simplified technique to determine the eligible amount. Individuals can claim deductions for their retirement contributions and their premiums for self-employed health insurance.

Are there any specific tax deductions available for startups?

Yes, specific tax deductions and concessions are available for startups in Australia. These may include deductions for certain professional expenses incurred in establishing the business and the ability to immediately deduct certain startup costs under the simplified depreciation rules.

Can I claim tax deductions for expenses incurred before my business generates income?

Yes, you may be able to claim deductions for certain pre-business expenses incurred before your business started generating income. These expenses are typically considered incurred when setting up or establishing your business. They may include costs such as market research, obtaining professional advice, and registering your business.

How do I claim tax deductions for my small business?

To claim tax deductions for your small business in Australia, keep detailed records of all expenses related to your business throughout the financial year. You can include these deductions when lodging your business tax return with the Australian Taxation Office (ATO). Ensuring that all deductions claimed are legitimate and supported by appropriate documentation is important.

Which tax deductions are the most straightforward and uncomplicated?

One of the simplest deductions is the standard deduction, which decreases your adjusted gross income. This is a variable figure that might fluctuate annually for tax purposes. The deduction amount is contingent upon your filing status. Another simple tax deduction is subtracting the health insurance premiums paid as self-employed.