The end of the fiscal year is a time of year that everyone looks forward to. However, there are a few things you should know about small business tax deductions before you and your accountant start sweating and panicking about it.
As a sole trader, you are qualified to claim a number of tax breaks that you probably weren’t even aware of.
Small businesses, especially sole traders, typically struggle at the end of the fiscal year because they are unsure of exactly what information to give their accountant or what kinds of deductions they are allowed to claim.
Ways for a Sole Trader to Reduce Taxes
- A few start-up costs are instantly deductible
Since July 1, 2015, the ATO has implemented new regulations that permit small firms to instantly deduct certain start-up costs that were previously required to be deducted over a five-year period.
Small firms with $10 million or less in annual revenue are eligible for these deductions. The various expenses that can be written off includepayments paid to specialists for advice or services regarding the intended organization or conduct of the business, or payment to a government agency for fees, taxes, or charges associated with starting the business.
Let’s say you want to start a company that sells swimwear online. You meet with your accountant to decide how to best structure your firm. Having registered your business as a sole trader, you can then immediately deduct the cost of your consultation with the accountant and any costs that resulted during the business registration process.
- Small enterprises can write off assets purchased below $20,000
A small firm will not be required to depreciate an asset over a specified number of years if it purchases one for less than $20,000. Instead, the item can be immediately deducted. The deadline for this quick write-off concession, which was initially implemented in 2015, is June 30, 2018. The $1,000 instant write-off barrier will once again apply as of June 30, 2018. Therefore, if you want to take advantage of it, it’s crucial that you buy the asset and have it prepared for usage by June 30, 2018.
Learn more about the advantages and disadvantages of being a sole trader here.
- Get income protection
You are dependent on the revenue from your firm as a sole trader. You typically are the one that does all of the labour and brings in all of the money. Because of this, it is even more crucial that you obtain income protection insurance to cover your expenses if you are unable to work for a lengthy period of time.
The good news is that you can deduct the whole cost of your income protection insurance premium on your income tax return.
You are also advised to research the sole trader insurance options that are available.
- Submit home office expense claims (if applicable)
As a sole trader, it’s typical to run your business out of your home environment. In the event that you do this, you may deduct your home office expenses. Examples of costs you can deduct for working from home include but are not limited totelephone, internet, and computer expenditures, as well as those for gas and electricity, office furniture and equipment repairs, and cleaning costs.
You may also be able to deduct a portion of your rent payments if you rent your residence. The area of your home that is used for commercial purposes must be determined, and the rental expense must be calculated accordingly.
Home-based company owners can deduct expenses like mortgage interest, council fees, land taxes, and house insurance. However,you will be expected to allocate the expenses based on how much is used for business purposes, much like the rent expense.
However, and this is crucial, if you do deduct occupation costs for operating your business from your home, you will forfeit some of your capital gains exemption when you eventually sell your house. This implies that you will be required to pay capital gains tax on the same amount of your house for which you were claiming costs.
It is not in your best interests to claim occupancy costs because, in the vast majority of circumstances, this is a negative outcome.
The ATO provides a specified rate per hour as an alternative to the above as a deductible expense for home office expenses. The current rate is 45 cents per hour.
- File interest costs
Many sole proprietors will unavoidably utilize their personal funds to assist their businesses as they get them off the ground. You are entitled to a deduction for the interest you pay on loans that you take out to finance your business.
It’s vital to keep in mind that if you borrow money and use some of the proceeds for business purposes and some for personal expenses, you must divide up the interest deduction so that it only applies to the portion of the loan that was utilized for business purposes.
For instance, continuing with our example from above, let’s say you loaned your business $20,000 from your personal account to get it off the ground. Any annual interest you paid on this loan can be reimbursed.