In 2019-Tax-Tips

Small Business & Tax Tips

Starting a small business can be an exciting and rewarding experience. However, it’s important to be aware of the various tax implications involved in running a business. In this blog post, we will provide some tips on minimising your taxes and keeping your business running smoothly.

As a small business owner, you have a lot on your plate. It can be hard to know where to start between managing your business and keeping up with the ever-changing tax laws. But don’t worry – we’re here to help! In this blog post, we’ll provide some tips for reducing your tax bill and making the most of available deductions. So read on for helpful advice that will make filing your taxes a little bit easier.

There’s no getting around it – tax season is coming. That can mean extra paperwork and a higher chance of making mistakes for small business owners. But don’t worry, we’re here to help. We’ll go over some tips for preparing your taxes as a small business owner in this post. We’ll also cover common mistakes to avoid, so you can rest easy knowing that you’re doing everything right.

You know that there are many things to think about when it comes to running your business. But, unfortunately, taxes are one of those things. And, if you’re not careful, you could end up paying more in taxes than you need to. 

That’s why it’s important to know about the different tax tips for small businesses. In this blog post, we’ll provide you with some helpful tips so that you can minimise your tax bill and keep more money in your pocket. So, read on for advice on saving on taxes as a small business owner!

As a small business owner, you have to stay on top of your finances – including your taxes. So here are some tips to help make tax season a little less stressful. First, make sure you keep good records throughout the year. This will make it easier to track your expenses and deductions. 

Additionally, be aware of which tax breaks are available to small businesses. For example, the ATO offers a variety of deductions for businesses that operate out of their home. Finally, consult with an accountant or tax specialist who can help you maximise your tax savings. You can make tax season a little less daunting and potentially save yourself some money by following these tips.

There are many important decisions to make and tasks to juggle. And when it comes time to file your taxes, the last thing you want to worry about is whether you’re doing everything correctly. That’s why we’ve put together this guide of small business tax tips. You can use it as a resource throughout the year so that when tax season rolls around, you’ll be confident that you’re taking the appropriate steps. 

It’s important to make sure you’re taking advantage of all the tax deductions and credits available to you. Here are a few tips to help you get started. First, make sure you keep good records of your expenses. This includes receipts, invoices, and bank statements. Next, be sure to claim all the deductions available to you. 

These include things like office supplies, vehicle expenses, and advertising costs. Finally, take advantage of any credit programs offered to small businesses. This could include things like government grants or low-interest loans from local banks. 

You can reduce your tax bill and keep more money in your wallet by following these tips!

Let’s get started!

Small Business And Tax

Just how important small business is can be demonstrated by the government giving the small business sector a break on a range of tax matters.

For small businesses just starting, the government recently introduced additional tax relief, which may help to reduce the tax burden in those difficult early days.

Called small business tax concessions, there are several options that smaller enterprises can take up if they satisfy that $10m turnover test.

The new relief applies to all businesses with an aggregated turnover of less than $10m a year (most businesses in the start-up phase). It allows an immediate deduction for many professional costs incurred in starting a business venture, such as costs for accounting and legal advice, as well as a range of government charges and taxes.

Individuals who intend to set up a small business through another entity such as a company or trust can also claim the relief. In other words, the entity claiming the deduction for start-up costs (the individual) need not be the same, which ultimately runs the business (the company or trust).

The Golden Rule – Keep Records

Tax law requires that records be kept for five years, and they should include:

  • Sales receipts
  • Expense invoices
  • Credit card statements
  • Bank statements
  • Employee records (wages, super, tax declarations, contracts)
  • Vehicle records
  • Lists of debtors and creditors
  • Asset purchases

Records can be kept on paper or electronically but should be easily retrieved. Unfortunately, in our experience, businesses often stumble when asked by the ATO to verify transactions by providing supporting records, with the consequence that even “innocent” businesses can find themselves struggling to be unable to provide the requested evidence.

Tax Planning Tips

The end of the tax year will soon be upon us, with June 30 just around the corner. So now’s a good time to take a look at both your expected taxable income (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 help guide your tax planning strategy.

Tip: Refer to the Australian Taxation Office’s tax rates (sole trader) or company tax rates to identify your income bracket and the tax you’re likely to incur.

If you are expecting to have a higher income this financial year, compared to your projections/expectations for the next financial year, you can talk to your accountant to consider:

  • You are prepaying some of your 2020-21 expenses (such as your rent, insurance or subscriptions to professional associations) in the 2019-20 financial year. Up to 12 months of the following year’s expenses can be deducted in the current tax year.
  • Take advantage of the instant asset write-off, which enables you to immediately deduct assets you purchase for your business costing less than the associated threshold (whether the asset is purchased new or second-hand). Thresholds have changed over the past few years and will reduce to $1000 from July 1 2020, so check the ATO website for full details.
  • If appropriate, you are reviewing and postponing some of your invoices for the current tax year.
  • I am topping up your voluntary superannuation contributions.
  • Reviewing your debtors and writing off any unrecoverable debts.
  • If applicable, deduct any start-up expenses – such as obtaining legal or accounting advice on your business structure and fees about establishing the structure (e.g. ASIC company registration fee).

If you are expecting to have a higher income next financial year (2021-22), you can talk with your accountant to consider:

  • If it’s appropriate to do so, bring forward any invoicing into the current financial year for scheduled work carried out in the next financial year.
  • Paying your expenses as they are due, rather than prepaying them in advance during the current tax year.
  • Purchasing any required equipment or business assets this year. If you decide to purchase business assets, you should base this decision on the needs of your business. For example, you might need to purchase a vehicle for deliveries to help expand your business operations to achieve business goals or because it is in line with your business plan.

What Can Be Claimed?

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A new business can immediately deduct costs incurred in getting advice from a lawyer or accountant on how to structure the business. 

This includes advice on whether to set up the business as a company, trust or partnership, how the business should be financed, the costs of market research, and so on. It also covers costs incurred in setting up the business’s legal structure.

Eligible costs would also include professional advice on the viability of the proposed business (including due diligence where an existing business is bought) and the development of a business plan. Also covered would be the costs associated with raising debt and equity capital for the operation of the proposed business.

You can claim the deduction even if the business doesn’t go ahead. For example, you might prepare a business plan, which ultimately demonstrates that the business will not be profitable, and hence choose not to proceed.

It’s also now possible to claim an immediate deduction for a range of payments to government agencies relating to the regulatory costs incurred in setting up the new business. This includes costs such as the fee for creating a company and costs associated with transferring assets to that entity, such as stamp duty.

Some of the more obvious nuggets on the list worth considering are:

  • Advertising and sponsorship costs
  • Bank fees
  • Tender costs (even if the tender is unsuccessful)
  • Travel expenses for relocating employees
  • Interest on some borrowings
  • Home office expenses such as a portion of your rent or mortgage (See the ATO website) for more information
  • Insurance premiums including car, building or cover for professional or public liability
  • Key office expenses such as electricity bills, phone bills, rates, water bills, rent or lease payments for business premises, repairs or maintenance to the property
  • Business memberships and magazine subscriptions
  • Education, technical or professional qualifications expenses
  • Tax expenses such as preparing and lodging tax returns and BAS

Also, the not so obvious:

1. Buy Assets Now And Benefit

Meanwhile, there are still a few weeks to take action on some other lucrative tax perks your small business may have overlooked. For example, do you need new assets? Now may be a good time to purchase them. 

As part of the federal budget, small business and sole traders have been given a $20,000 asset purchase tax deduction for any entity with an active ABN whose turnover is less than $10 million. 

The items purchased can be brand new or second hand and need to relate to your business. Therefore, this new deduction has been extended to June 30, 2018.

Also, under this perk, if you want 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 portion used for business use.

2. Erase Bad Debt

Review bad debts before the end of the financial year to reduce your tax bill – If the debt is unlikely to be recovered, write it off now. This would prevent the debt from becoming taxable income, which would require the business owner to pay tax on the amount.

Small businesses should undertake several other steps before June 30, including checking their current debtor ledger, identifying debts where the other party is bankrupt or has entered into liquidation, and noting debts that are more than six months old.

3. Assess Stock

It’s also time for small businesses to review their stock and inventory. Identify any damaged or obsolete stock and write it down or write it off. This exercise will impact the value of the trading stock and your profit margins.

4. Gather Up Those Records

An easier step for owners is to add up all work-related expenses that may not be immediately obvious, such as political donations, car maintenance, business travel, stationery, and other office supplies.

A quick scan around your small business will undoubtedly result in dozens of tax deductions, but strangely some of the most lucrative ones get forgotten. So take the time to make sure you sniff out every deduction this year. After all, it’s money that belongs back in your pocket.

5. Deductions For Interest Incurred

The availability of interest deductions are typically affected by the following factors:

  • Interest must have a sufficient connection with the income-earning activities of the taxpayer
  • interest on a new loan is deductible if the new loan is used to repay an existing loan. At the time of the second loan, was used to produce assessable income or as part of a business to produce assessable income
  • interest on borrowings will not continue to be deductible if the borrowings cease to be employed in the borrower’s business or for some income-producing activity, or which are used to earn exempt income
  • interest may still be deductible even if the borrower’s business has ceased. This rule can apply to other assessable income-producing activities. Still, it would not apply to the derivation of exempt income
  • interest may be deductible if incurred before a business commencing or assessable income being derived
  • the character of the interest is generally determined by the use to which the borrowed funds are put
  • the “rule of 78” may be used in limited circumstances to calculate the interest component of instalments paid under a fixed-term loan or extended credit transaction. Penalty interest for early repayment of a loan may be deductible, and
  • an interest deduction can be claimed for money borrowed for the business to pay a tax debt.

6. Companies

Interest costs incurred by companies may be deductible if the money:

  • is used to repay share capital to shareholders if that capital was employed as working capital in the company business and is used to derive assessable income, or
  • funds the payment of a declared dividend to shareholders. The funds representing that dividend are employed as working capital in the company business, and it is used to derive assessable income.

A deduction is not allowed if the borrowed funds are used to:

  • repay share capital to shareholders to the extent it represents bonus shares paid out of an unrealised asset revaluation reserve or other equity accounts (for example, internally generated goodwill), or
  • pay dividends out of unrealised profit reserves.

7. Borrowing Expenses

If costs are incurred to obtain a loan, the costs of arranging it are allowable as a deduction to the extent the loan is used to produce assessable income. Expenses claimable under this heading include:

  • legal expenses associated with mortgage documents
  • valuation fees incurred
  • procuration fees and mortgage insurance (if any)
  • stamp duty payable on mortgage documents, and
  • any other cost items for taking the loan.

If the total cost of these expenses is less than $1 00, ii can be claimed in the income year the expense is incurred. However, if more, the claim will need to be spread equally over the lesser of the loan term or five years commencing from the date the loan was entered into.

If you incur borrowing costs on several dates for different facilities, you cannot simply add them to the opening balance of your yet-to-be-deducted borrowing costs for that year. Instead, it is necessary to calculate these new borrowing costs separately.

8. Review Your Subscriptions

The end of the financial year (EOFY) is a perfect time to see if your business is paying for services and software that you don’t use.

One of the easiest ways to start with subscriptions is by looking at the last time you logged in. Often, you end up having lots of little subscriptions.

Even Spotify, it’s $10 a month. Moreover, if you use Hootsuite for your social media platforms, but you’re actually posting directly to all of your social channels, then why pay for it?

Depending on your business’s cash flow, you may want to consider paying premiums in advance.

If you can pay the premium in advance, you know, for 12 months rather than doing it month by month. Sometimes that will add maybe $100, $200 a year to the premium cost. So it’s a built-in interest charge, even if it’s not said to be that.

Do I Need An Accountant To Do My Tax Return?

Whether your finances are straightforward or more complex, you may choose to do your tax return yourself or engage a professional.

If you have multiple sources of income, various investments, possibly your own business or have lots of deductible work-related expenses, using an accountant (who’ll need to be a registered tax agent) to prepare and lodge your tax return may be useful.

However, suppose the only income you earn is from your employer, and you don’t have many deductions to claim or investments you’re making money on. In that case, you might choose to lodge your tax return online via my tax, which is accessible through the Australian government’s myGov website.

Maximise Your Small Business Tax Return

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1. Take advantage of the instant asset write-off

From March 12 2020, until June 30 2020, the instant asset write-off threshold is $150,000 (up from $30,000) for businesses with an aggregated turnover of less than $500 million. 

This means you can purchase an asset of up to $150,000 until June 30 and claim a deduction for the full amount on your tax return, rather than partially writing off the asset based on its depreciation rate.

From July 1 2020, the small business tax write-off threshold will drop back to $1,000 and only apply to businesses with an aggregated turnover of less than $10 million.

2. Make voluntary super contributions

Pre-tax super contributions, known as concessional super contributions, are taxed at 15%. This is lower than the lowest income tax rate of 19% and company tax rate of 27.5%, and you can claim a deduction on contributions.

The concessional super contributions cap is $25,000 for individuals. However, suppose you plan to claim a deduction for your concessional contributions. In that case, you’ll need to provide a ‘Notice of intent to claim or vary a deduction for personal super contributions’ form to your super fund.

3. Defer income

Depending on your situation, you may be able to defer some income to reduce your taxable income for the 2019-20 financial year.

For example, if you delay sending an invoice until July 1 2020, the invoice amount will count towards your taxable income for the next financial year rather than this year.

4. Review your debtors

You can claim a tax deduction on unrecoverable debts regardless of the year in which you invoiced them, as long as you can show that the debt was initially included as income and has been written off by June 30.

Document your decision to write off the debt, as this can be used as evidence that the debt was written off before EOFY.

5. Lodging your tax return yourself

If your finances are relatively simple, you might consider lodging your tax return (which you’ll need to do by October 31 for the previous financial year) while saving money on what a registered tax agent might charge you.

According to the Australian Taxation Office (ATO), the benefits of lodging your tax return online via the myTax system are safe, secure and most of the information from your employer, bank, and government agencies will be pre-filled for you by around late August 2.

Meanwhile, even if your situation is a little more complex, you can still use myTax if you have investments, rental properties, capital gains or are a sole trader.

On top of that, the service is available all day, every day, so you can lodge your return at any time, and you’ll generally get your refund within two weeks, which may be faster than doing it another way.

6. Engaging a registered tax agent

If you do want to use a registered tax agent to prepare and lodge your tax return, it’s important to note you will pay a fee for their service, but it’ll typically be deductible in the next financial year.

Note, tax agents must be registered with the Tax Practitioners Board (TPB), and you can find a registered tax agent or check whether a person is registered by visiting the TPB website5.

If your finances are more complex, going down this path may provide you with peace of mind, as it could save you time, highlight deductible work-related expenses you didn’t know about while ensuring all your claims are legitimate.

On top of that, most registered tax agents have a special lodgement program, which means they can usually lodge returns for their clients after the usual October 31 deadline. Still, you’ll need to contact them beforehand to ensure that’s something you can take advantage of if you want to.

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