Small Business Tax Deductions
You can claim most expenses involved in running your business. Just make sure:
- they relate directly to earning your income
- the expense must have been for your business, not for private use
- if the expense is for a mix of business and private use, you can only claim the portion that is used for your business
- you have records to substantiate what you claim.
You may be able to claim deductions for the following types of business expenses:
- motor vehicle expenses
- home-based business
- business travel expenses
- workers’ salaries, wages and super contributions
- repairs, maintenance and replacement expenses
- other operating expenses
- depreciating assets and other capital expenses
- carbon sink forest expenses.
Business tax deductions
You can claim a tax deduction for most expenses from carrying on your business, as long as they are directly related to earning your assessable income.
What you can claim
There are three golden rules for what we accept as a valid business deduction:
- The expense must have been for your business, not for private use.
- If the expense is for a mix of business and private use, you can only claim the portion that is used for your business.
- You must have records to prove it.
For example, if you buy a laptop and you only use it for your business, you can claim a deduction for the full purchase price. However, if you use the laptop 50% of the time for your business and 50% of the time for private use, you can only claim 50% of the amount as a deduction.
You can’t claim the GST component of a purchase as a deduction if you can claim it as a GST credit on your business activity statement.
What you can’t claim
There are some expenses that are not deductible, such as:
- entertainment expenses
- traffic fines
- private or domestic expenses, such as childcare fees or clothes for your family
- expenses relating to earning income that is not assessable, such as money you earn from a hobby
- the GST component of a purchase if you can claim it as a GST credit on your business activity statement.
Remember, if you earn PSI your deductions may be limited.
When you can claim your deduction
The type of expense – operating expense or capital expense – determines when you can claim your deduction. Generally, you can claim:
- operating expenses (such as office stationery and wages) in the year you incur them
- capital expenses (such as machinery and equipment) over a longer period.
For operating expenses, you generally incur the expense when you have a legal obligation to pay for the goods or services. An invoice is not necessary for an expense to have been incurred, but you do need a record of the expense.
If you use an item in your business for only part of a year you generally need to restrict your claim to the period it was used for the business.
Claiming a deduction for a prepaid expense
There are different rules for expenses you pay in advance – that is, expenses you incur now for goods or services you will receive (in whole or in part) in a later income year.
Where the expense is $1,000 or more you will usually need to apportion (or distribute) the expense across the whole supply or service period if you:
- won’t receive the goods or services in full within 12 months
- are not eligible for an immediate deduction.
Types of expenses
Learn more about the different categories of expenses:
Claiming a tax deduction for motor vehicle expenses
- Claiming a tax deduction for motor vehicle expenses
- As a business owner, you can claim a tax deduction for expenses for motor vehicles – cars and certain other vehicles – used in running your business.
- For a summary of this content in poster format, see Motor vehicle expenses (PDF, 761KB)This link will download a file.
Claiming a tax deduction for expenses for a Home-based business
If you operate some or all of your business from your home, you may be able to claim tax deductions for home-based business expenses in the following categories:
- occupancy expenses (such as mortgage interest or rent, council rates, land taxes, house insurance premiums)
- running expenses (such as electricity, phone, decline in value of plant and equipment, furniture and furnishing repairs, cleaning)
- the expenses of motor vehicle trips between your home and other locations, if the travel is for business purposes.
For a summary of this content in poster format, see Home-based business expenses (PDF, 438KB)This link will download a file
From 1 March 2020 to 30 June 2021, you have the option of a temporary shortcut method. This is similar to the fixed rate but with a higher rate of 80 cents an hour for each hour that you operate your business from home. It is an all-inclusive rate so you can’t separately claim running expenses using any other methods.
When you sell your home, you may have to pay capital gains tax (CGT). It’s important to keep the right records to work out your deductions or CGT.
If you’re entitled to goods and services tax (GST) input tax credits, you must claim your deduction in your income tax return at the GST exclusive amount.
Claiming a tax deduction for business travel expenses
As a business owner, the general rule is that you can claim deductions for expenses if you or your employee are travelling for business purposes. A travel diary is:
- compulsory for sole traders and partners in a partnership to record overnight business travel expenses
- highly recommended for everyone else.
For a summary of this content in poster format, see Travel expenses (PDF 526KB)This link will download a file
Claiming a tax deduction for workers’ salaries, wages and super contributions
As a business owner, you can generally claim a tax deduction for:
- The salaries and wages you pay to employees
- Super contributions you make on time to a complying super fund or retirement savings account (RSA) for your employees and for certain contractors.
- Salary and wage expenses are a type of operating expense (sometimes called working or revenue expense).
If you’re a sole trader, you can usually claim a deduction for your own super contributions in your personal tax return.
Claiming a tax deduction for repairs, maintenance and replacement expenses
You can claim a tax deduction for expenses relating to repairs, maintenance or replacement of machinery, tools or premises you use to produce business income, as long as the expenses are not capital expenses. A capital expense is money spent to purchase assets like plant and equipment.
What you can claim
You can claim expenses from allowable repairs, maintenance or replacement, including: painting, conditioning gutters, maintaining plumbing, repairing electrical appliances, mending leaks, replacing broken parts of fences or broken glass in windows, repairing machinery.
You don’t have to own the property or item that is repaired in order to claim a deduction. A repair is one that restores the efficiency of function of the asset without changing its character, in order to maintain it in its original state. For example, you can fix defects or renew parts but you can’t totally reconstruct something.
What you can’t claim
You can’t claim capital expenses, such as:
- substantial improvements to an item or property – for example, installing a new ceiling
- repairs made to machinery, tools or property immediately after you purchase or acquire them – this is because the price you paid reflects the item’s condition.
You can generally claim a deduction for capital expenses under the:
- general depreciation provisions – for items
- capital works provisions – for property.
Claiming a tax deduction for other operating expenses
Operating expenses are the expenses you incur in the everyday running of your business. Examples include office stationery, renting premises and purchase of trading stock. These expenses are sometimes called working or revenue expenses.
You can generally claim a tax deduction for most operating expenses in the same income year you incur them. Ensure you keep accurate and complete records of these expenses as they occur.
You can only claim the business portion of these expenses if they relate to both business and private use, for example mobile phone calls.
Operating expenses that are common in business include:
- purchases of trading stock, including delivery charges
- advertising and sponsorship
- legal expenses, such as those incurred defending future earnings, borrowing money, discharging a mortgage or obtaining tax advice
- tender costs, even if the tender is unsuccessful
- bad debts
- bank fees and charges
- insurance premiums, including accident or disability, fire, burglary, professional indemnity, public risk, motor vehicle, loss of profits insurance, or workers compensation
- interest on money borrowed for;
- producing assessable income or purchasing income-producing assets
- income tax obligations, employer super contributions, or late payment or lodgment of tax
- small-value mobile phone and tablet accessories
- for example, protective covers and earphones
- costs for running a commercial website
- for example, site maintenance and content updates
- internet service provider fees
- subscription fees for off-the-shelf software
- transport and freight
- waste removal and recycling
- parking fees (but not parking fines)
Other expenses (similar to those claimed by employees)
As a business owner, you are also able to claim deductions for some business expenses that are the same as those that can be claimed as a deduction by employees, including:
- union dues and subscription fees to trade, business or professional associations
- clothing expenses (corporate wardrobes or uniforms and occupation-specific and protective clothing)
- expenses relating to education and technical or professional qualification
- subscription costs for business or professional journals, information services, newspapers and magazines
- costs for sunglasses, sunhats and sunscreen when your business activities require outdoor work
- other items that protect you or your employees from a health or injury risk in your work environment
- gifts and donations to organisations that have a deductible gift recipient status.
Business premises operating expenses
Business premises operating expenses include: electricity, landline phone calls and line rental, mobile phone calls (prepaid or as part of a plan), internet service fees, data plans, cloud storage, water, renting or leasing business premises, rates, land tax.
Tax-related operating expenses
Tax-related expenses such as;
- registered tax agent and accountant fees
- having a bookkeeper prepare your business records
- preparing and lodging tax returns and activity statements
- objecting to or appealing against your assessment
- attending an ATO audit
- obtaining tax advice about your business
- credit card/charge card payment fee associated with paying a business tax liability, for example, GST liability.
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Text Source: Australian Taxation Office