Small Business & Tax Tips
Taking the plunge to launch a new venture may be a thrilling and gratifying adventure. Running a business, on the other hand, comes with a variety of tax ramifications, all of which should be taken into consideration. In this piece, we will discuss various strategies that can help you reduce your tax liability while also ensuring the continued success of your company.
You have a lot of responsibility on your shoulders because you own a small business. When you’re running a business and trying to stay on top of ever-shifting tax regulations, it can be difficult to know where to begin. However, there is no need to be concerned because we are here to lend a hand. In today’s post, we’ll go over several strategies for lowering your tax liability and getting the most out of the deductions that are open to you. Therefore, read on for some useful suggestions that will make the process of filing your taxes a little bit simpler.
There is no avoiding the fact that tax season will soon arrive. For owners of small businesses, this might result in increased amounts of paperwork and an increased risk of making mistakes. However, there is nothing to be concerned about because we are here to assist you. In this piece, we will discuss some helpful hints for owners of small businesses when it comes time to prepare their taxes. We’ll also go over the most common errors people make, so you can be certain that you’re following the instructions correctly.
When it comes to the operation of your company, you are aware that there are a lot of different factors to consider. However, paying taxes is sadly one of those tasks that must be done. And if you aren’t attentive, you can find up paying more in taxes than you really ought to have to pay.
This is the reason why it is essential to have knowledge of the various tax recommendations for small firms. This article will present you with some useful advice that you can put to use immediately to lower the amount of money that you owe in taxes and put more of that cash back into your own pocket. So, if you own a small business, keep reading for some suggestions on how to cut your tax bill!
You have a responsibility as the owner of a small company to maintain control of your financial situation, which includes paying your taxes on time. The following are some suggestions to assist make the time spent preparing taxes a little less stressful. To begin, you need to ensure that you keep accurate records throughout the entire year. Keeping a record of your expenditures and deductions will be simplified as a result of this.
In addition, it is important to be knowledgeable about the many tax exemptions that are offered to small businesses. For instance, the ATO provides a wide range of deductions for enterprises that are conducted out of a private residence. Last but not least, you should speak with a tax professional or an accountant who can assist you in minimizing the amount of money you pay in taxes. If you follow these recommendations, tax season will be a bit less stressful for you, and you may even end up saving some money for yourself.
There are numerous significant choices to be made as well as responsibilities that need to be balanced. When it comes time to file your taxes, the last thing you want to be concerned about is whether or not you are handling things in the appropriate manner. For this reason, we have compiled this guide of tax considerations for small businesses. You can consult it as a resource at any point during the year so that when tax time comes around, you’ll feel certain that you’re proceeding in the right direction.
It is essential to be certain that you are qualifying for all of the tax deductions and credits to which you are entitled. To get you started, here are some pointers that you can use. First and foremost, be sure that you keep detailed records of all of your financial transactions. This contains both receipts and invoices, in addition to any bank statements. Next, make sure you take advantage of every possible deduction that is open to you.
These include items like the cost of advertising, vehicle expenses, as well as office supplies. Finally, it is important for small businesses to take advantage of any loan programs that are available to them. This may include things like subsidies from the government or loans at low-interest rates from local institutions.
If you follow these suggestions, you’ll be able to lower your tax liability and retain more money in your pocket.
Let’s get started!
Small Business And Tax
The fact that the government provides tax breaks and other types of assistance to small businesses is evidence of how critically crucial this sector of the economy is.
The government has recently announced further tax assistance for small firms that are just getting started. This relief may help to alleviate the burden of tax payment during those early days of a company’s existence, which may be particularly challenging.
If an organization’s annual revenue is less than $10 million, it is eligible for a number of tax breaks referred to as “small business tax concessions,” and it must meet a turnover threshold of that amount to qualify.
The new exemption is available to all types of companies that have annual sales of less than $10 million combined (most businesses in the start-up phase). It enables an instant deduction for a variety of professional expenditures that are incurred in the process of beginning a new company endeavor. Some examples of these costs include fees for accounting and legal assistance, in addition to a variety of governmental charges and taxes.
Individuals who want to establish a small business via another entity such as a corporation or trust are also eligible to make a claim for tax relief under this provision. In other words, the individual who files the claim for the deduction for start-up expenditures does not necessarily have to be the same entity that ultimately operates the business (the company or trust).
The Golden Rule – Always Keep a Record of Operations
It is required by tax law that records be retained for a period of five years, and these documents should include:
- Sales receipts;
- Expense invoices;
- Vehicle records;
- Lists of debtors and creditors;
- Acquisition of assets;
- Statements for credit card purchases;
- Bank statements;
- Employee records, including pay, benefits, tax filings, and contract information.
The records can be preserved on paper or electronically, but they should be retrievable with little effort. Unfortunately, in our experience, businesses frequently trip up when asked by the ATO to authenticate transactions by providing supporting records. As a result, even “innocent” firms can find themselves struggling to be unable to give the needed documentation.
Tax Planning Tips
The 30th of June is quickly approaching, which means that the end of the financial year will be here before we know it. Therefore, now is a good time to take a look at both your expected taxable income (which is essentially your business’s assessable income, minus any allowable deductions) for the current financial year 2020-21; and your projected/expected taxable income for 2021-22, as they will both help guide your strategy for tax planning. This is because your expected taxable income for the current year will help guide your strategy for the following year.
A helpful hint is to determine your income band and the amount of tax you are expected to owe by consulting the tax rates (sole trader) or corporate tax rates published by the Australian Taxation Office.
You should consider having a conversation with your accountant about the following scenarios in the event that you anticipate having a higher income during the current fiscal year in comparison to your predictions or expectations for the subsequent fiscal year:
- During the 2019-20 fiscal year, you will prepay a portion of the costs that you will incur in the 2020-21 fiscal year, such as your rent, your insurance, or your subscriptions to professional groups. The current tax year permits the deduction of up to 12 months’ worth of costs incurred during the following year.
- Take advantage of the instant asset write-off, which allows you to immediately deduct the cost of any assets that you buy for your company that cost less than the threshold associated with that asset (whether the asset is purchased new or second-hand). Check the website of the Australian Taxation Office for complete information, as thresholds have shifted over the previous few years and will decrease to $1,000 as of July 1, 2020.
- You are conducting an audit of your bills for the current fiscal year and may defer payment on some of them if necessary.
- I am increasing your payments to your voluntary superannuation account.
- reviewing your debtors and cancelling any debts that cannot be recovered from them.
- Deduct, if necessary, any costs associated with getting your firm off the ground, such as consulting with an attorney or accountant about your company’s organizational structure and paying fees related to setting up that structure (e.g. ASIC company registration fee).
If you believe that you will have a larger income for the following fiscal year (2021-22), you should discuss the following options with your accountant:
- To the extent that it is feasible to do so, any billing-related work that is anticipated to be completed in the following fiscal year should be brought forward into the current fiscal year.
- paying your bills when they come due rather than making any payments toward them in advance during the current tax year is considered to be a timely payment.
- purchasing any necessary assets or pieces of equipment for the firm during this year. If you go ahead and make the decision to buy assets for your company, you should do so with the requirements of your company in mind. For instance, you might need to buy a vehicle for use in the delivery of goods in order to help extend your business operations, which would either get you closer to achieving your business goals or be in line with your business plan.
What Can Be Claimed?
Expenses incurred by a new company in obtaining guidance on how to structure the business from a professional such as a lawyer or accountant are immediately deductible.
This includes advise on whether the firm should be established as a company, trust, or partnership; how the business should be financed; the costs of market research; and a variety of other topics. This also includes the fees that were incurred when establishing the legal structure of the business.
In addition, charges such as professional advice on the sustainability of the proposed business (including due diligence in the case of the purchase of an existing business) and the creation of a business plan could be considered eligible for reimbursement. In addition, the expenditures that are incurred in the process of raising debt and equity capital for the purpose of operating the proposed firm would be reimbursed.
Even if the firm does not move forward, you are still able to submit the deduction. For instance, you might design a business plan, which finally reveals that the company would not generate a profit, and as a result, you might decide against moving through with the venture.
Additionally, it is now feasible to claim an instant deduction for a variety of payments to government agencies related to the regulatory expenditures that were paid in the process of establishing the new firm. This covers fees such as the fee for founding a business as well as fees involved with transferring assets to that entity, such as stamp duty. This also includes any other costs that may be incurred.
On the list, some of the more obvious gems that deserve your consideration are as follows:
- Expenses related to advertising and sponsorships;
- Bank fees;
- Costs associated with the tendering process (regardless of the outcome of the tender);
- Expenses incurred by employees who are being relocated;
- A portion of the interest on various borrowings;
- Expenses related to your home office, such as a share of your rent or mortgage (for further information, visit the website of the ATO);
- Insurance premiums, such as those for a vehicle, a property, or protection against professional or public liability;
- Key office expenses such as energy bills, phone bills, rates, water bills, rent or lease payments for business premises, repairs or upkeep to the property;
- Key office personnel expenses such as salaries, benefits, and insurance;
- Memberships in professional organizations and magazine subscriptions;
- Education, technical or professional qualifications costs;
- Expenses related to taxes, including the preparation and submission of tax returns and BAS.
In addition to this, the less obvious:
1. Invest in Assets Right Away, and You Will Benefit
In the meantime, there are a few weeks left in which you can take advantage of many other potentially lucrative tax breaks that your small business may have neglected. For instance, do you need to acquire any additional assets? It might be a smart idea to make the buy right now.
As part of the government budget, small businesses and sole traders have been awarded a tax credit for the purchase of assets in the amount of $20,000, provided that the organization has an active ABN and its annual revenue does not exceed $10 million.
The objects you buy can be brand new or used, but they still need to have some kind of connection to your company. As a result, the deadline for claiming this new deduction has been pushed back to June 30, 2018.
Additionally, if you wish to purchase a phone or a laptop for your small business but will also be using it for personal use, you can claim a deduction on the amount of the purchase price that was used for business usage. This benefit is available to you if you want to take advantage of it.
2. Erase Bad Debt
Review your bad debts before the end of the fiscal year in order to lower the amount you owe in taxes. If it is highly improbable that the debt will be recovered, you should write it off at this time. This would prohibit the debt from being considered taxable income, which would in turn prevent the owner of the company from being required to pay taxes on the amount.
Before the 30th of June, small firms should complete a number of additional actions, such as verifying their current debtor ledger, identifying debts in which the other party is bankrupt or has moved into liquidation, and recording debts that are older than six months.
3. Assess Stock
Additionally, now is the time for smaller firms to conduct a stock and inventory check. Find any stock that is broken or no longer needed, and either write it down or write it off. The value of the trading stock as well as your profit margins will be impacted as a result of this exercise.
4. Start Gathering All of Those Records
Calculating the total cost of all work-related expenses, including some that might not be immediately apparent, like political donations, automobile maintenance, business travel, stationery, and other office supplies, is a step that owners can take to make the process simpler.
A cursory investigation of your small business will surely reveal dozens of opportunities for tax deductions; nevertheless, surprisingly enough, some of the most valuable deductions are overlooked. Therefore, make sure you spend the time necessary to investigate each potential deduction for this year. After all, it is money that should be returned to your possession where it belongs.
5. Deductions For Interest Incurred
In most cases, the following criteria will have an impact on whether or not interest deductions are available to you:
- The taxpayer’s activities that result in income must be sufficiently connected to the activities that generate the interest;
- When a new loan is used to pay off existing debt, the interest paid on the new loan may be deducted from the new loan’s total cost. was put to use at the time of the second loan to generate taxable revenue either independently or as a component of a business that generated taxable income;
- If the borrowings are no longer used in the borrower’s business or for some other activity that produces money, or if they are used in a manner that results in tax-free income, then the interest on the borrowings will no longer be deductible.
- interest may still be deductible even if the borrower’s business has terminated. This regulation might also apply to other activities that are liable to produce taxable income. Nevertheless, it would not be applicable to the generation of tax-free income;
- When interest expenses are incurred prior to the beginning of a business or the generation of assessable revenue, they may be eligible for tax deductions.
- The purpose for which the funds were borrowed is typically taken into consideration when determining the type of interest charged;
- The so-called “rule of 78” can be applied to the computation of the interest portion of the instalments that must be paid back on an extended credit transaction or a loan with a fixed duration in certain circumstances. It is possible to claim a tax deduction for the prepayment penalty interest on a loan;
- When a firm borrows money to pay off a tax debt, the interest paid on that loan is deductible as a business expense.
Companies could be able to deduct the interest expenses they pay if the money was used to:
- is utilized to refund share capital to shareholders if the capital in question was employed as working capital in the firm business and if the capital in question is used to derive assessable income;
- provides the means for the payment of a dividend that has been declared to shareholders. The money that was distributed as a dividend is put to use by the company as working capital, and it is also put to use in the process of producing income that can be taxed.
If the borrowed money is used for any of the following, the deduction will not be allowed:
- refund share capital to shareholders to the extent that the capital reflects bonus shares issued out of an unrealized asset revaluation reserve or other equity accounts (for example, internally produced goodwill);
- dividends should be paid out of unrealized profit reserves wherever possible.
7. Costs Associated with Borrowing
If you have to pay fees in order to get a loan, the fees are tax-deductible to the degree that the money from the loan is utilized to generate taxable revenue. Expenses such as the following are eligible for reimbursement under this heading:
- the costs of legal representation for mortgage-related paperwork;
- valuation fees that were paid for;
- expenses associated with obtaining the mortgage and mortgage insurance, if any;
- stamp duty payable on mortgage documents;
- any additional expenses that are associated with taking out the loan.
If the aggregate amount of these charges is less than one hundred dollars, then itemized deductions can be submitted in the same tax year that the expenses were incurred. In the event that the amount is more, the claim will have to be proportionately distributed over the shorter of the loan term or five years, with the clock starting to run from the day the loan was originated.
If you incur borrowing costs on multiple dates for separate facilities, you cannot simply add them to the opening balance of your still-to-be-deducted borrowing costs for that year. This is because the opening balance represents the total amount of borrowing costs that have not yet been deducted. Instead, it is essential to determine these new borrowing costs on their own.
8. Take a Look at Your Current Subscriptions
At the end of the fiscal year, also known as EOFY, it is the perfect moment to evaluate whether or not your company is paying for software and services that it does not employ.
Checking the date and time that you were last signed in is one of the quickest and easiest methods to get started with subscriptions. You may find that you have a large number of smaller memberships than you anticipated.
Even Spotify charges a monthly fee of ten dollars. In addition, if you utilize Hootsuite to manage your social media platforms, but you post to all of your social channels directly, then there is no reason for you to pay for Hootsuite.
You might wish to take into consideration paying your premiums in advance depending on the financial flow of your company.
If you are able to pay the annual premium in one lump sum rather than on a monthly basis, this may be the most cost-effective option for you. In some cases, the premium price will increase by perhaps one hundred or two hundred dollars per year as a result of this. Even if it isn’t specifically labelled as such, this is still a form of interest charge; hence, it is built-in.
Should I Get an Accountant to Do My Tax Return, or Can I Do It Myself?
You have the option of preparing your tax return or hiring a professional to handle it for you, regardless of how basic or complicated your financial situation is.
It may be beneficial for you to hire an accountant (who will need to be a registered tax agent in order to prepare and lodge your tax return) if you have a number of different sources of income, a number of different investments, possibly even your own business, or if you have a large number of deductible work-related expenses.
But let’s say that the only income you bring in comes from your job, and you don’t have a lot of deductions to claim or investments that are bringing you a profit. In this scenario, you’d be in a tough spot. If this is the case, you should consider filing your tax return electronically through my tax portal, which can be accessed through the myGov website of the Australian government.
Maximise Your Small Business Tax Return
1. Take full use of the immediate write-off of assets.
The instant asset write-off threshold will increase to $150,000 (from $30,000) beginning March 12, 2020 and continuing through June 30, 2020 for enterprises with an aggregated turnover of less than $500 million.
This implies that you can purchase an asset of up to $150,000 until June 30 and claim a deduction on your tax return for the entire amount, rather than having to partially write off the asset based on the rate at which it depreciates.
The small business tax write-off threshold will return to $1,000 on July 1, 2020, and it will only be available to companies whose annual aggregated revenue is less than $10 million. This change will take effect.
2. Make payments to your retirement fund on a voluntary basis
Concessional super contributions, often known as pre-tax super contributions, are subject to a tax rate of fifteen percent. This is lower than the lowest income tax rate, which is 19 percent, and the corporation tax rate, which is 27.5 percent; in addition, you can claim a deduction on contributions.
The maximum amount that an individual can contribute to their concessional superannuation account is $25,000. Nevertheless, let’s say you’re thinking of trying to get a tax break for the concessional contributions you’ve made. If this is the case, you will be required to submit a form to your super fund that is labelled “Notice of intent to claim or vary a deduction for personal super contributions.”
3. Delay the receiving of income
You might be able to lower the amount of income that is subject to taxation for the 2019-20 fiscal year by deferring some of the money that you earn. This will depend on the specifics of your position.
For instance, if you delay sending an invoice until July 1, 2020, the amount of the invoice will be counted toward your taxable income for the following financial year rather than for this year. This is because the next financial year begins on July 1.
4. Review your debtors
Regardless of the year in which you invoiced unrecoverable debts, you are eligible to claim a tax deduction on those debts so long as you can demonstrate that the debt was initially included as income and has been written off by the end of the fiscal year (June 30).
Maintain records of your decision to cancel the debt, as this can serve as evidence that the debt was cancelled before the end of the fiscal year (EOFY).
5. Lodging your tax return yourself
If your financial situation isn’t overly complicated, you might be able to file your tax return on your own (which you are required to do by October 31 for the preceding fiscal year) and save money compared to the fees that a registered tax agent would charge you.
According to the Australian Taxation Office (ATO), the advantages of submitting your tax return electronically through the myTax system include safety and security, as well as the fact that the majority of the information required from your employer, bank, and other government agencies will be pre-filled for you by the middle of the second week of August.
In the meanwhile, if you have assets, rental properties, capital gains, or if you are a sole proprietor, you can still utilize myTax even if your position is a little more complicated than the average taxpayer’s.
In addition to this, the service is offered 24 hours a day, seven days a week, which means that you can file your return at any time, and you will typically receive your refund within two weeks, which is potentially a faster turnaround time than using another method.
6. Appointing a tax representative who is duly registered
It is vital to keep in mind that you will be required to pay a fee for the service of a registered tax agent in the event that you decide to employ their assistance in preparing and submitting your tax return; however, in most cases, this fee will be deductible in the subsequent fiscal year.
It is important to note that tax agents are required to be registered with the Tax Practitioners Board (TPB), and the website of the TPB can be used to locate a registered tax agent or determine whether or not a person is registered5.
If your financial situation is more complicated, taking this route may help you feel more at ease because it will likely save you time, bring to your attention deductible work-related expenses that you were previously unaware of, and ensure that all of your claims are founded in reality.
On top of that, the vast majority of licensed tax agents have access to a unique program that allows them to lodge returns for their clients after the regular October 31 cutoff date. This allows them to maximize their clients’ refunds. However, you will need to get in touch with them in advance in order to be certain that this is an opportunity you are able to take advantage of if you so choose.