Are you maximising your tax deductions?
Making sure your small business is claiming the maximum allowable tax deductions is a core component of long-term financial success.
While most tax deductions are simply the business expenses that show on the bank statement, there are two significant ones which require calculation at the end of the tax year.
This article provides a summary of how to apply deductions for vehicle expenses and home office expenses.
Owners of small businesses often use their personal vehicle for business purposes. This might occur even when they have a dedicated work vehicle. For example, you might use the family car to shoot across town to do a quote; or ask your spouse to drop you to the airport to fly to the NZ Plumbing Conference; or use the family car while the work vehicle is in getting repairs. Over the course of a year, this can add up to a fair bit of running around.
In my accounting practice I have had quite a few clients say not to bother with this deduction as they hardly use their private vehicle. Yet when we look closely it turns out they have used it a surprising amount.
Inland Revenue publishes the rate per kilometre that can be claimed for this type of vehicle use. For the tax year to 31 March 2023, this rate is 95 cents per kilometre. This means that if you tallied up 1000 kilometres of business travel in the private car, your deduction will be $950. Depending on your tax rate, this is likely to result in a tax saving of a few hundred dollars.
The other significant expense that is sometimes overlooked is when home office space is used for the business. Unless you are leasing commercial premises, it is likely you have some space set aside at home where business administration and organisation is done. This might be a dedicated office, or desk in the corner of the lounge. Many trade businesses running from home also commandeer the garage or workshop for storing tools and doing maintenance. This space can also be factored in.
From a tax point of view, the business is using things like rates, electricity, gas, insurance, telephone and internet costs, which are all being paid for personally. Therefore, an adjustment is allowed to allocate some of the home cost to the business.
There are a couple of ways to tackle the home office calculation. Generally, I find the simplest approach is the ‘Square metre rate option’. Using this approach there is no need to keep detailed records of utility costs. Instead, Inland Revenue publishes an annual rate, which in the year to 31 March 2023 was $51.05 per square metre. This rate is then plugged into a formula which factors in the percentage of the home that is being used by the business, as well as the mortgage interest, rates or rent paid for the property.
Depending on the situation, it is not uncommon for a small business home office deduction to equate to a few thousand dollars, resulting in potential tax savings of several hundred dollars.
Small business owners who ensure their vehicle expenses and home office costs have been correctly accounted for will stand a good chance of making worthwhile tax savings. Certainly, a discussion with your accountant about these matters will be time well spent.