13 tax tips for small businesses owners
While it may not be everyone's favorite time of year, tax season is a fact of life for every small business owner. And when you're running a new business, every dollar counts — especially during tax season. Because there are so many other things to focus on, small business owners are often missing important ways to save more on their returns.
We'll help you determine if you qualify as a small business and offer 13 tips for filing with confidence.
Do you qualify as a small business?
To receive a small business tax deduction and benefits, you must first qualify.
The base qualifier is having less than $10 million in turnover. Turnover, or aggregated turnover, is the amount total in transactions — incoming and outgoing — throughout the tax year. According to the Australian Tax Office (ATO), you can use three methods of determination:
- Based on the turnover from last year
- Estimated turnover for this year
- Use your actual turnover for this current year
Method one is the easiest and what most people use when filing their taxes. Method two can be best determined by basing the estimate on previous years' turnover and seeing those same trends in the current year. As Method three uses actuals, it is the most accurate method to use.
If you are not a small business, you may still be eligible for concessions. Read more on the ATO's help page.
However, if you do qualify, here are 13 tips you can use this year to help you plan and get the most out of your tax season.
1. Utilize accounting software
This may be an obvious first step but business owners often get caught up in the numbers as they look to know every detail of their taxes for next year. The problem with this is that you could forget a step or miss out on benefits. Instead, avoid the headache of balancing your books by hand and use a software program like MYOB or Xero. These will help you save money and back up your records for the future.
2. Keep financial records organised
Having accurate records throughout the tax year will help you save time when you file. Streamline your tax preparation by adding your capital gain, cash flow and business expense in one place.
Cloud accounting and file sharing are great ways to collaborate on accounting details that others, like your accountant, can easily add or edit information. This is helpful throughout the year to keep track of staffing, invoicing and inventory.
You'll want to keep track of all of your transactions like payroll, investments, and of course, any money coming in. Doing so helps you know which transactions you can write off as business expenses or qualified deductions.
3. Home office deductions
Many small business owners work out of their homes but not all of them realize that this can be written off as a deductible expense. Take note of which parts of the home are used to run the business and keep track of the expenses associated with them. These can be items such as insurance, internet service or office hardware, like a printer.
4. Car expenses deduction
Similar to your home office, the expenses need to be associated with work. However, it can include any repairs or fuel. A great option could be to research adding novated leases to your benefits package if it works within your budget. A good rule of thumb for making your vehicle a novated lease is, according to One Car Group, if you are using your vehicle for business reasons more than 50% of the time.
Read more about which assets and expenses you can qualify as deductions on the ATO's Business Tax Deductions page.
5. Cuts in company tax rate
If you run your small business through a company structure, you qualify for the lowest tax rate, which is 26% for the 2020/2021 year and drops to 25% for the 2021/2022 year.
6. Capital gains tax (CGT)
Small business owners must be aware of how a taxable capital gain is calculated on the sale of an applicable asset. If you run your business as an individual (a "sole trader") or through a trust structure and you have held the asset for more than 12 months, you will receive a 50% discount on the capital gain. However, if you run your business through a company structure, there is no discount. The full capital gain is assessable.
7. Fringe benefit tax (FBT)
Small business owners must also be aware of a possible FBT liability. Broadly, these are expenses paid by your business that are considered to be of a private nature. The most common example is a business car that is also used for private purposes.
8. Goods and services tax (GST)
This is a tax on 10% of all applicable goods and services you sell. However, if your business income is less than $75,000 within 12 months since the establishment of your business, there is no need to register for GST. However, as soon as you pass this threshold, you must register with the ATO within 21 days. There are a couple of exceptions:
- Taxi and rideshare workers must register for GST no matter how much they've made.
- Not-for-profit organisations do not need to register until they've reached $150,000.
You can register on the Australian Business Register's official website.
9. Write-off bad debts
To avoid being assessed on invoices that you have determined will never be paid, and you can demonstrate a concerted effort to try and recover, you can write the debt off. This includes businesses that have gone bankrupt or entered into liquidation.
10. Extend when necessary
If you engage a tax agent to prepare and lodge your tax return, there is an extension of time to lodge. You should be on the agent's books by October to be eligible for the six-month extension into May.
In certain circumstances, the ATO will also allow an extension of time to lodge your return.
11. Budget your time
Tax season with or without an agent is still time-consuming. You'll need to allocate time with your bookkeeper to finalise the year along with your tax agent and/or your advisor as well.
12. Hire a tax professional before you need one
Realising at the last minute that your books are not prepared and you're not sure what qualifies as deductible can make an already stressful tax season worse. Instead, it's best to hire an accountant or agent to help you plan out your tax season ahead of time, keep track of your expenses as they happen and lodge when the time comes. It's better to prepare before you're faced with a pile of paperwork or worse, the ATO sending you letters that something was off or you missed something.
13. Know how to file your taxes and deductions
If you decide to work with an agent who knows all of the details of small business taxes, you must determine that by 31 October. Wilson Porter can help you take the stress out of filing for taxes, checking off all of the boxes yourself and scrutinising every digit. We have experienced accountants who can help you with your business tax lodging. We know that no business is the same, and we will take the necessary steps to ensure you get back every cent you deserve.
To get started, contact us today.