For business owners in New Zealand, mastering the navigation of business expenses and tax returns is pivotal for financial efficiency and compliance. A business pays taxes on income after expenses have been deducted. In essence, the higher your expenses, the lower your tax bill, making expenses a crucial part of your financial strategy. Managing business expenses effectively can significantly impact a business's success.
Understanding Business Expenses
Business expenses are the costs incurred during the daily operations of your business, ranging from rent and utilities for your premises to purchasing inventory or paying salaries. The Inland Revenue Department (IRD) permits the deduction of these expenses from your income, thereby reducing your taxable profit and your tax bill.
What Can Be Deducted?
Only expenses directly related to earning business income are deductible. Common deductible expenses include:
Rent and Utilities: Costs for renting business space and utilities such as electricity, water, and internet services.
Salaries and Wages: Compensation and benefits for employees.
Travel Expenses: Business-related travel costs, both domestic and international.
Vehicle Expenses: Expenses for business use of a vehicle, including fuel, insurance,
parking, repairs, and cleaning.
Depreciation: The yearly depreciation expense for assets valued over $1,000,
accounting for the decrease in value of business assets like computers and machinery.
Interest on Borrowing: Interest on business loans.
Insurance Premiums: Certain business-related insurance premiums.
Professional Association Memberships and Subscriptions: Fees for professional associations and work-related publications.
Stationery, Work Uniforms, and Mobile Phones: Essential stationery, specific work uniforms, and work-related mobile phone expenses.
Investment property expenses related to your business, such as repairs, maintenance, professional service fees, rates, insurance, and capital expense depreciation, are also deductible. This list is not exhaustive, and some expenses may be specific to your industry. A helpful guideline is whether the cost aids in generating taxable income.
Keeping Accurate Records
Maximizing deductions heavily relies on meticulous record-keeping. Detailed records of all business transactions, including receipts and invoices for all expenses, are essential. Accurate record-keeping supports your deductions during an IRD audit and ensures you're claiming all eligible expenses.
Timing of Expenses
An often overlooked aspect of business finance is the timing and strategic planning of expenses. Proper timing can significantly enhance deductions. For example, accelerating expenses, such as purchasing inventory or equipment before the year-end, can increase deductions and reduce tax liability. This strategic approach is where 93 Accounting excels in assisting our clients.
At 93 Accounting, we engage in proactive discussions with our clients to forecast their tax liabilities and advise on strategies to minimize tax burdens. By assessing tax liabilities ahead of time, we empower our clients to make informed decisions about their expenses and investments. This tailored advice impacts both the present financial health and future success of the business.
Home Office Expenses
Running a business from home allows for deducting a portion of home expenses, including a percentage of rent or mortgage interest, utilities, and insurance, based on the business use of the home. Proper calculation and claiming of these expenses can yield significant savings.
Entertainment and Meals
Entertainment and meal expenses are only partially deductible, typically 50% if directly related to your business. Understanding the specific rules for entertainment expenses is crucial.
Professional and Legal Fees
Directly related professional services, like accounting or consultancy fees, are fully deductible. These services not only support business growth and compliance but also reduce taxable income.
Maximizing Depreciation
Depreciating assets that lose value over time, such as equipment and vehicles, can significantly impact your tax obligations. The method of depreciation you choose—whether straight-line or diminishing value—can affect both your immediate and future depreciation expenses, influencing your tax position.
Straight-line depreciation spreads the cost of an asset evenly over its useful life. This method provides a consistent, annual deduction amount, which can simplify budgeting and financial planning. It's particularly beneficial for businesses seeking a stable expense pattern without significant fluctuations in their annual tax liabilities.
On the other hand, the diminishing value method accelerates the depreciation deductions in the earlier years of an asset's life. This approach can result in higher deductions in the initial years, potentially lowering your taxable income more significantly at the start but offering smaller deductions as the asset ages. This method can be advantageous for businesses looking to maximize their tax deductions in the short term, supporting cash flow during the early stages of an asset's use.
Choosing between these methods depends on your business's financial health and strategic planning goals. For some, the immediate tax savings offered by the diminishing value method can help with cash flow in the short term. For others, the predictability of straight-line depreciation is more aligned with long-term financial planning.
At 93 Accounting, we delve into these types of discussions with our clients to ensure they make the best depreciation decisions for their business. This is not just about optimizing for the current tax year but planning effectively for future tax filings as well. A vital step is to sit down with your accountant and map out your tax strategies, considering how the choice of depreciation method fits into your overall financial picture. Click here to contact us.
Navigating business expenses and tax returns involves a deep understanding of what expenses are deductible, maintaining meticulous records, and strategically managing finances to maximize deductions. By staying informed and possibly seeking professional advice, business owners can optimize their tax returns, reduce their tax liability, and invest more in their business's growth. Partnering with a firm like 93 Accounting offers personalized guidance and strategic financial planning to make the most of your deductions and support your business’s growth. Click here to contact us.