What can I claim as a tax deduction when I am in business?
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GRA Blogs
Articles by John Heaslip
Apart from a few special rules, any cost necessary to run your business will probably be tax deductible.
However, there are a few things to be aware of - some items that you might assume could be claimed can't be, and conversely, there may be others you didn't realise are legitimate expenses.
General
If you have "incurred" an expense, you can claim it, even though you might not yet have paid it. Note that some costs that provide future benefits, like insurance, may not be fully claimable in the year incurred.
Inland Revenue may not tell you how to run your business. If you want to run a Mercedes car, it is your choice. You cannot be told a cheaper car will do the same job. However, if the expense has a personal flavour about it, such as a couple going out to dinner and calling it a directors’ meeting, you will not be allowed to claim the cost.
Business versus private expenses
Some payments appear to be necessary for business but are deemed private. Here are a few examples:
• Travel from home to work and back
• The clothes you wear to work unless they are protective clothing like overalls for a painter and sneakers for a roofer. To qualify, the clothes have to be subject to undue wear and tear or of a specialised type - not normal apparel. For example work-boots, overalls.
• Socialising with mates in a pub
• Spectacles
• Costs of getting into business, such as a lawyer’s bill and the cost of creating a limited liability company
• Usually, the cost of taking your non-working partner on an overseas business trip
• The costs relating to installing new machinery, including travel to go and evaluate it
• The debt repayment portion of hire purchase, finance lease or other loans
The above costs are either considered to be personal or costs to put you in a position to do business, as opposed to actually doing it.
Expenses which have an ongoing benefit to the business over a period of years are "fixed (or non-current) assets." You can only claim a proportion of their cost each year, known as depreciation.
Use of home
If you use part of your home for business, IRD will accept a claim for a portion of the costs. The portion is work out as a percentage of the total home. For example, if the home office is 9m2, and total home is 100m2, then the portion of costs will be 9%. The standard costs would be:
• Rates
• Insurance
• Interest on mortgage
• Repairs and maintenance
• Power
A few things to note:
- If the business uses the garage, include this as part of the area used for business
- Substitute rent for interest on mortgage etc, if you do not own the house
- Keep supplier tax invoices
- You can also claim GST on the business share of these costs
- If your business is a company, the home office-related bills will not be made out to it. In this case, claim reimbursement from the company because you are one of its employees.
- Generally, where income is only interest and dividends, there is no claim for use of home to run your investments.
Motor Vehicle expenses
Rather than re-inventing the wheel, please refer to Anna Loginova’s blog on claiming motor vehicle expenses.
Telephone/ Internet
Unless you keep records to show the contrary, IRD allows you to claim half domestic telephone rental/internet for business if the phone/internet is used for both private and business, so long as the business element is reasonably significant.
Entertainment
This is complicated. If you want full details on claiming entertainment, you can get a booklet from IRD.
Interest
Interest is generally tax deductible. However, borrowing to buy real estate can be tricky, as there are new rules surrounding interest deductions for residential investment properties. You should get specialist advice from us about tax deductibility of interest payments.
Business Expenses
Don’t be tempted to pay yourself an expense allowance. IRD gets concerned that not all of it will be spent on business costs - they prefer actual expenditure.
If your business is a limited liability company, an expense allowance may be permissible on the basis you are an employee of the company. You need to discuss this with your accountant before you determine the amount of the allowance.
If you need cash for parking meters, keep a float in the car and draw cash to top it up from time to time as needed. Try to keep some evidence to show the money was really spent on parking. (You can only do your best.)
Pay as much as you can through your business bank account. For other small petty cash items, keep a notebook. Record the date, nature of cost and amount. Keep supporting receipts where you can. When the business owes you a reasonable amount, get reimbursed from the business bank account and record this in your notebook.
If you are unsure whether an expense can be claimed, please contact us at GRA - phone +64 9 522 7955, email info@gra.co.nz or via our website.
John Heaslip
Business Advisory Director
© Gilligan Rowe & Associates LP
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Disclaimer: This article is intended to provide only a summary of the issues associated with the topics covered. It does not purport to be comprehensive nor to provide specific advice. No person should act in reliance on any statement contained within this article without first obtaining specific professional advice. If you require any further information or advice on any matter covered within this article, please contact the author.
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