We all love a good refund, but how they are calculated when you are running a business can be a bit of a mystery.

In essence, you only need to pay tax on your profit! It gets complicated when we start to sort out what is a business-related expense and what is not...

What is a tax deductible expense?

A tax-deductible expense MUST be directly related to your business. You need to keep all receipts and documentation, and it must be necessary and ordinary for your business.

Tax Deduction Examples:

Let’s say your business had income of $100,000 and you spent:

• $10,000 on a contractor
• $5,000 on advertising
• $3,000 on a laptop
• $7,000 on rent
• $2,000 on internet and phone

That’s $27,000 in deductions.

You’ll only be taxed on:
 $100,000 - $27,000 = $73,000 taxable income.

If you use your laptop to play games, for personal use or anything other than work, then you need to calculate what percentage of time you use the item for and reduce the deductible amount appropriately.

Perhaps you use it 50% of the time for games.

Let’s say your business earned $100,000 and you spent:

• $10,000 on a contractor
• $5,000 on advertising
• $3,000 on a laptop – 50% of this is $1,500
• $7,000 on rent
• $2,000 on internet and phone

That’s $25,500 in deductions, which is $74,500 taxable income.

This calculation also applies to your use of your phone, company car, and other company resources, and can also affect the annual depreciation on items over the years. So if you’re using your car for the school run, to buy groceries, or to travel for the weekend with family, you may be filing your taxes incorrectly.

What is Depreciation?

If you purchase an asset, you can also claim depreciation. Depreciation is the decline in value of that asset. For example, if you purchase a four-wheel drive ute for your business at $60,000, it’s going to be worth less over time. Depreciation is the tax deduction you get for the decline in value over time. If the ute is going to last for 10 years, then a simple depreciation calculation would be to claim $6,000 each year over those 10 years, until the purchase price has all been claimed.

This calculation helps to show the realistic cost of business activities, reduces the tax you need to pay, and might be useful in planning updates and upgrades.

Assets that might be depreciated include vehicles, office equipment, machinery, phones and communication equipment, computers and tablets, and more. You should check with your accountant to make sure you’re claiming everything you possibly can!

Some items will be depreciated over time, however with others you may be able to write it off instantly. This means that you can claim the full price as a tax deduction in the same financial year you purchased the asset.

If you’re unsure or confused?

Reach out! We’re always happy to help, and can offer advice and tax services such as accounting, bookkeeping, tax planning and more. Just drop an email to [email protected]  to let Helen know you’d love a chat, or give us a call on 08 9185 9400 today!