How to maximise tax deductions in your small business – legally

If you’re like many small business owners or business professionals at this time of year, you like to review your tax position and evaluate any year-end strategies that may legitimately reduce your tax.

There is plenty of excellent insight around about year-end tax planning for both small businesses and professionals. Much of this can show you how to maximise tax deductions.

I’ve gathered together the best of this insight and I’d like to share it with you in this post…

Prepayment strategies for maximising tax deductions

Prepaying expenses can result in claiming a full deduction in the year of payment, where the payment covers a period of no more than 12 months.

The kind of expenses that may be prepaid include:

• Rent on business premises or equipment
• Lease payments on business items such as cars and office equipment
• Interest – check with your financier to determine if it’s possible to prepay up to 12 months interest in advance
• Business trips
• Training courses
• Business subscriptions
• Cleaning

The potential tax benefits of trading stock

You can choose whether or not to conduct a stock take and account for changes in the value of trading stock, if there is a difference of $5,000 or less between:

• The value of your stock on hand at the start of the income year, and
• A reasonable estimate of the value of your stock on hand at the end of that year

The $5,000 threshold applies to increases and decreases in the value of your trading stock.

If the difference is more than $5,000, you must conduct a stock take and account for changes in the value of your trading stock at the end of the income year.

An increase in the value of trading stock also results in an increased profit for the business.

Other small business ideas for how to maximise tax deductions

• Maximise depreciation deductions – if you intend to purchase assets for business purposes, you may choose to purchase these prior to the end of the financial year to maximise your depreciation deductions.
• Work-related car expenses – ensure you have a current log book prior to the end of the financial year to enable you to maximise your deductions.
• Bad debts -review bad debts and write off any that are not recoverable prior to the end of the financial year.

How professionals can maximise tax deductions

The following are some suggested ways for professionals to maximise tax deductions, as the end of the tax year approaches…

• Work-related car expenses – if you haven’t kept a log book, you are able to claim work-related motor vehicle expenses using the cents-per-kilometre method (for up to 5,000 work- related kilometres travelled).
• Work-related clothing – keep receipts for compulsory work uniforms, protective clothing, and protective footwear.
• Claiming self-education expenses – keep receipts for any study-related items for courses that directly relate to maintaining or improving your current occupational skills.
• Home office expenses – if you are spending time working from home, then you are able to claim some running expenses.
• Mobile phone and internet – if you use your mobile phone and internet for work, then you are able to claim tax deductions for the work-related portion of these expenses.
• Union membership – the cost of union membership is deductible, so remember to keep receipts.
• Subscriptions – those paid to trade, business or professional associations are deductible when directly connected with earning assessable income.
• Tools and equipment – if you purchase and use these items for work-related purposes, then remember to keep your receipts.
• Charities – keep receipts for any tax-deductible donations made. We recommend donations are made in the name of the highest income earner.
• Capital gains – it is important to note that a capital gain is determined at the time a contract is entered and not the settlement date. If you are considering selling shares or property, you may wish to delay signing the contract until the new financial year, therefore deferring the income. If you have realised a capital gain during the financial year, you may choose to also realise a capital loss to assist with offsetting the capital gain.

You now have some legitimate, tried and tested ideas for how to maximise tax deductions in your small business or for your professional purposes. I really hope they’ve been useful.

If you have any questions about this or any other aspect of tax year-end, please feel free to call me on 02 4322 9044.