Business Expenses are costs that are incurred in the running of a business and most expenses incurred can be claimed to reduce a businesses’ net profit. These include:
· Accounting and bookkeeping fees
· Professional association memberships
· Business premises rent
· Mobile phone & internet bills that are business related
· Printing & stationary Expenses
· Interest on business loans
· Business insurance premiums
· Motor vehicle expenses
· Advertising
· Subscriptions – Xero, Hubdoc, Canva
Some of these expenses are 100% deductible however some expenses will only be partially deductible. The most common partially deductible expenses are home office expenses and motor vehicle expenses. The portion that relates to business can be claimed. E.g If you take a trip for business and 50% of the trip is also personal. Only claim the business portion.
Motor Vehicle Expenses
Full vehicle running costs can be claimed if the vehicle is used strictly for business purposes. The business portion needs to be recorded and the best way to do this is to keep a logbook for 90 consecutive days every three years. The IRD also has a mileage rate that can be used and more information can be found about claiming motor vehicle expenses can be found here. If you are using the mileage rate ensure that you DO NOT claim GST on the cost.
Depreciation
Assets such as motor vehicles, plant & equipment and computers need to be listed as a fixed asset and then depreciated. Depreciation is a way to claim back some money that was spent on the purchase of an asset. You can claim for the amount it depreciates each year, deprecition rates can be found on the IRD depreciation rate finder . IRD has a depreciation calculator to help you work out how much can be claimed on each asset each year.
Legislation was passed to increase the low value asset threshold from $500 to $5000 until the 16th March 2021 due to Covid 19. This threshold will then be permanently changed to $1000. All assets over these amounts will need to be depreciated at IRDs prescribed rates.
Depreciation can be claimed on:
· Software and Websites
· Motor Vehicles
· Some Residential Rental Chattels
Records need to be kept on the assets, depreciation claimed and adjusted tax value of each asset (value less depreciation expense). This is easy to do on Xero’s fixed asset register, which will calculate the depreciation each year and the depreciation schedule report shows all the above information in one report.
There are two depreciation calculation methods - Diminishing value and Straight Line depreciation. A method will need to be picked for each asset and the same method used throughout the life of the asset. Ensure that records are kept if any assets are used privately and for business. Only the business portion of depreciation will be able to be claimed as an expense.
Entertainment
Entertainment can be either 50% or 100% deductible, ensure that you read up on the rules to ensure that the correct amount is claimed.
Employing an accountant to complete your GST and end of year accounts could end up saving you money as they will ensure that all expenses that can be claimed are.
Records need to be kept for all business expenses for seven years. E.g. receipts, invoices, logbooks etc. Receipts DO NOT need to be sent to IRD with your tax return however you must be able to provide these if IRD reviews or Audits a business.
Document storage is a low priority for many people and they rely on their email to store invoices or a box filed with receipts. This is not the best option as a piece of paper can be misplaced and an email can be accidently deleted and there will no longer be a copy of the receipt. Apps such as hubdoc & receiptbank provide an electronic way to store receipts and also integrate with Xero. Paying for all business expenses through your business account helps to create a good audit trail.
Your net profit is calculated as total income less expenses, this means the more business expenses you can claim the smaller the tax bill. Ensure that all expenses are valid business expenses and that proof of the expense is kept in case required. Expenses can be claimed against income for all entity types Contractors, sole traders, companies and trusts.
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