The end of the financial year is a crucial time for small business owners throughout New Zealand. To maximise tax deductions and returns, it’s important that you understand what is tax deductible, what is not, and how you can effectively reduce your taxable business income.
Tax Deductible Expenses NZ Businesses
Please consider this guide to be general in nature and not specific tax advice. We recommend speaking directly with a certified and professional business accountant for specific questions related to your business.
1. Operating Expenses
From rent to utilities and from office supplies to advertising, operating expenses refer to any costs directly related to the running and ‘operations’ of your business.
2. Vehicle Expenses
Vehicles used for business purposes are eligible for expenses related to their maintenance being deducted from taxable income. This includes fuel, maintenance, repairs, insurance, and registration fees.
3. Depreciation of Assets
Deductions for wear and tear on business assets like computers, equipment, and furniture are all tax deductible. In New Zealand, computers have a 50% depreciation rate. (Source: Inland Revenue Department.)
4. Professional Services Fees
Any expenditure related to the fees for accountants, lawyers, consultants, and other professional services can also be claimed back from tax.
5. Employee Expenses
Employee-related expenses are tax deductible. This can include payroll and wages itself, but also contributions to KiwiSaver, training costs and professional development.
6. Home Office Expenses
If you legitimately work from home, there is often a portion of your mortgage interest, rates, insurance and utilities that can be claimed based on the percentage of your home used for business purposes.
7. Industry Memberships
Professional memberships and subscriptions, particularly for industry-specific associations, can be legitimately deducted from a business’s taxable income.
8. Networking Events
Costs associated with attending business networking events, conferences, and seminars can be tax deductible as well.
9. Bad Debt
If your business has uncollectible debts, in other words, outstanding invoices that your customers or clients are unlikely to pay, they can be written off as deductions.
10. Client-related Costs
Expenditure directly associated with business development and related to clients, such as costs of supplying lunch during a client meeting, can be tax deductible also.
Non-Tax Deductible Expenses NZ
It is important that you also have a strong understanding of expenses that are not tax deductible.
1. Personal Expenses
If the expenditure is not directly related to earning business income, it is not classified as a legitimate business expense.
2. Capital Costs
Costs for purchasing assets or making business-related improvements that have a long-term benefit are not tax deductible. However, these are usually depreciated over time rather than deducted immediately.
3. Fines and Penalties
Any costs incurred due to breaking laws or regulations, even while servicing a client or driving a company vehicle, cannot be claimed as tax deductible.
4. Entertainment Expenses
Entertainment expenses, even legitimate expenses for business purposes, exceeding 50% of the total cost are not deductible.
5. Private Vehicle Use
Personal use of company-owned cars cannot be claimed back as tax deductions.
6. Tax-Exempt Income Expenses
Costs incurred to generate income that is not taxable is not considered tax deductible.
If you would like to find more information about deductible and non-deductible expenses, visit the business.gov.nz website.
Maximising Tax Deductions
To make the most of available tax deductions, follow these strategies.
Understand What Is and Is Not Deductible
Invest the time and effort in familiarising yourself with the types of expenses you can claim. If in doubt, consult with a tax professional.
Keep Accurate Records
Meticulously maintain detailed records of all your business expenses throughout the year. This includes receipts, invoices, and bank statements. The better you are at filing your expense receipts, the more you’ll be able to claim.
Time Your Expenses
It can be a good idea for some businesses to prepay certain expenses before the end of the financial year so that they can then claim them in the current tax year.
Asset Purchases
Use your purchases of business assets to your benefit by taking advantage of any available instant asset write-off schemes for eligible asset purchases.
Review Your Home Office and Travel Expenses
If you work from home or travel for business, you may be able to claim a portion of your expenses as business deductions. Keep records of any expenditure, including equipment, accommodation, meals and transportation costs.
Review Outstanding Invoices
Review your outstanding invoices so you can identify bad debts. These can be written off accordingly before the end of the financial year to then claim as deductions.
Additional Considerations
There are a few additional considerations to take into account when trying to maximise your tax deductions. Make sure you have answered the following questions to streamline your EOFY experience.
Is it directly related to earning business income?
Before submitting claimed expenses for tax deductions, ensure they are directly related to earning business income and that you can prove that to be the case.
Is it a capital or revenue expense?
Be aware of the distinction between capital and revenue expenses, as this affects how they’re treated for tax purposes. Capital expenses are related to buying or improving assets and are not immediately deductible, whereas revenue expenses, such as costs associated with ongoing operations, are immediately deductible in the same year.
Seeking Professional Accounting Advice
While this guide provides an overview of common tax deduction categories and some general strategies to help you maximise your deductions, tax laws can be complex and subject to change.
It’s always recommended to consult with a qualified accountant or professional tax advisor to ensure you’re claiming all eligible deductions and complying with current tax regulations.
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