BG701 Small Business Tax
Taxco Business Guide
Small Business Tax
For small business owners, tax breaks often come in the form of tax deductions – which can offer a nice little instant cash savings – if you know how to navigate tax laws and claim the deductions you are allowed (not what you believe you are entitled to).
Large tax deductions are a notorious red flag for the SARS, with home-based businesses, in particular, facing an increase in tax audits due to suspicious deduction activity on income tax returns.
To help you navigate the complex world of business tax deductions, here is some foundational guidance that will help you take the deductions that you deserve.
Recordkeeping – Whatever the deductible expense may be, it is essential to maintain adequate records. There are many bookkeeping and accounting computer software programs available that will provide the basics for tracking expenses. But it is also important to keep receipts, invoices, etc., to back up the numbers. Some types of expenses require additional documentation, such as a log book or diary for business use of your personal vehicle or notations as to the business purpose of the expense (see Entertainment Expenses below). Keeping these records up-to-date will be a time-saver in the long run, especially if the SARS selects your return for audit.
Business Expenses vs. Capital Expenses – One of the first concepts a small business owner needs to understand is the difference between what can be expensed and what must be capitalized.
Business expenses are expenses that can be deducted in the current year, such as: business travel, rents, utilities, supplies, insurance, wages, customer entertainment and tangible items with a useful life of no more than one year. If you are a for-profit, these expenses are usually tax-deductible.
Capital expenses are those associated with purchasing fixed business assets, such as property and equipment that has a useful life of more than one year, and must be capitalized and depreciated over a period of years rather than be deducted as current year expenses. The number of depreciable years depends on the type of property. Here are some examples: office furnishings – 7 years, cars and light trucks – 5 years, computer equipment - 3 years.
Sometimes even capital items can be expensed all in one year by electing to use a special provision of the tax law that allows tangible property, such as computers, office equipment, tools and machinery, to be deducted in full in the year the property is placed into service a small business assets.
Although repairs are generally considered to be currently deductible expenses, there are occasions when that may not be true. If a repair or replacement increases the value of the property, makes it more useful, or lengthens its life, then it must depreciated. If not, it can be deducted like any other business expense.
Common Business Expenses - Below are some typical types of business expenses that qualify for deductions and special rules associated with them.
Car Expenses – To take the business deduction for the use of your car, you must determine what percentage of the vehicle was used for business, based on a ratio of business miles to total miles driven. Deductible costs can include the cost of traveling from one workplace to another, making business trips to visit customers or to attend meetings, or traveling to temporary workplaces. Be sure to maintain complete mileage records. However, commuting to and from your regular place of business is not a business expense. When it comes to claiming car expenses, there are two methods:
a) Actual Expenses – Add your annual car operating expenses (including gas, oil, tires, repairs, license fees, lease payments, interest on vehicle loans, registration fees, insurance and depreciation). Multiply the car operating expenses by the percentage of business usage to get your deductible expense. Business-related parking and road/bridge tolls are fully deductible and don’t have to be reduced by the percentage of business use. Note: the interest paid on vehicle loans is not deductible by employees who use their personal vehicles on the job.
b) Standard Mileage Rate – The standard rate changes each year and is based on the value of the vehicle multiplied by the business kilometres travelled.
Business Use of Your Home – If you use part of your home for your business, you may be able to deduct expenses for items such as mortgage interest, insurance, utilities, repairs, and depreciation. To qualify, you must use the business part of your home must be used exclusively and regularly for your trade or business.
Entertainment Expenses – This includes any activity considered to provide entertainment, amusement or recreation. To be deductible, you must generally show that entertainment expenses (including meals) are directly related to, or associated with, the conduct of your business. Recordkeeping is essential – you will need to keep a history of the business purpose, the amount of each expense, the date and place of the entertainment, and the business relationship of the persons entertained.
Travel Expenses – These are “ordinary” and “necessary” expenses while away from home when the primary purpose is conducting business. Your home is generally considered to be the entire city or general area where your principal place of business or employment is located. Out-of-town expenses include transportation, meals, lodging, tips, and miscellaneous items like laundry, valet, etc.
Document away-from-home expenses by noting the date, destination and business purpose of your trip. Record the business miles if you drove to the out-of-town location. In addition, keep a detailed record of your expenses - lodging, public transportation, meals, etc. Always list meals and lodging separately in your records. Receipts must be retained for each lodging expense (proves you were out-of-town).
Conventions – It is not coincidental that most conventions are held in resort areas during the spring through early fall months. Convention planners know quite well that convention timing and location is the key to its success. If planned properly, attendees can deduct a portion of the expenses for establishing business relationships and gaining business knowledge while enjoying a mini-vacation. Even without a convention, business travel can be married with some personal relaxation while still providing a partial or complete deduction. It is important to be aware of when the deductions are legitimate as well as when they are not.
Where a companion, such as a spouse, accompanies the taxpayer, the companion's meals and travel expenses are generally not deductible. In addition, deductible-accomodation expense is based upon the single occupancy rate.
Marketing and Advertising Expenses - Although marketing and advertising is generally thought of in terms of print ads, flyers and radio and television advertising, they also can include marketing that is intended to portray a business positively. Such marketing creates a long-term potential for business and falls within the ordinary and normal requirements of the tax code.
Examples of such marketing include sponsoring local youth sports teams, distributing samples of your business product, and costs associated with prizes offered by your business in a contest. As long as your marketing expenses can be reasonably related to the promotion of your business, they can be deducted.
How can Taxco help
The foregoing is a brief overview of some of the many deductions available to the small business owner. However, every business is different and has its own unique expenses. If you have questions related to deductible expenses for your business, please Contact us.
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