Legit Business ExpensesJun 14, 2022
The biggest question in most business owners' minds is what are legitimate business expenses? When you're running a business, it's all well and good to look at the top line and think about the money coming in, but we've also got to look at the money going out the door, so this is something you need to discuss with your accountant.
You see I discovered I wasn't claiming anywhere near what I could be when I started this business a decade ago. After my first year in business, I rocked up to my accountant's office and I was quickly advised that because I ran my business part-time from home, I was entitled to claim a percentage of my home expenses.
This included bills like electricity, gas, water, and even some minor office expenses like coffee, milk, and sugar. Now bear in mind, that this was in 2013 here in Australia, and the rule at the time was, per square foot. This meant I needed to measure the entire house and then work out how much space my office used to compare to the entire house.
This then gave me a percentage share of the home office area. We also had to factor in that I was only working a few hours from home in the evenings which gave us the time use percentage. The next task was to gather all the utility bills and consumables for the year to give us the annual figure that could be claimed. Their total was divided by the percentage used on the average week in running the business to obtain the costs associated with running a partially home-based business.
Now, many of us work from home, maybe as much as full time since the great freeze of 2020. But we can't forget, if you go out and met a client at a cafe for a meeting and you pay for the coffee or lunch for that meeting, that's claimable here in Australia also. You need to check with your accountant when claiming for different things to make sure you can do it in your region, and make sure that you can claim it in your industry as well because certain countries have different laws relating to industries, not just location but industry-specific laws.
You can also look at recording platforms that you use to connect with clients. If you use something like Zoom to hold meetings with clients, then that subscription becomes a business expense as well.
Then you might need to look at claiming expenses for your car. Here in Australia, we have a logbook system where you keep a record of how many kilometers, you're doing for about 12 weeks. After this period, you don’t have to do it again unless your circumstances change significantly. For example, since the pandemic, I'm not driving anywhere near as much as I was before. So, if I do get back in the car to go to client offices, I would be required to complete a new log book.
The logbook system also gives us the opportunity to know our personal use vs. business. If I were to drive to the shops to get groceries vs. driving into the city to see a client, the logbook will give a percentage use of the vehicle. The exception to this is company-owned and fully operated vehicles, they may not have any private usage at all.
Even if you are brand new in business, this is where it pays to engage with a professional. Consult with an accountant early on and ask what you can claim so that you are keeping the right receipts, keeping track of the right expenses so that you know exactly where you sit. Hopefully in that conversation as well, you're talking about your end tax position because this is the big thing, forecasting the expected income and the expenses to offset against our income to reduce our tax paid is the goal.
Don’t forget to look outside the square because if there's something or multiple tiny somethings that can be claimed in your business, even if it’s $10 or $20 a month, it can all add up quickly. It could end up being thousands per year coming off your taxable income as an expense in your business.
Don't be afraid to ask the questions, find out the answers that you need.
Ensure you are well-informed and push for the answers you need, and if you think it's silly, ask anyway. Because if you don't ask, you don't know, and there could be things that you're not claiming in your business that you are entitled to.