What expenses can I deduct from my business?

One of the benefits of running your own business is that you can reduce your taxable income by deducting legitimate business expenses.

The expenses you can claim must be those incurred in production of income.

How business expenses trim your tax bill

To understand how business expenses reduce your tax, let’s say you made R1 200 000 in the current tax year and you incurred R380 000 worth of legitimate business expenses. Instead of being taxed on R1 200 000, you’re taxed on R820 000, so you pay less tax.

How much tax does a business pay?

The rate payable is determined by the legal structure of the business:

• As a sole proprietor or partnership there is no distinction between you and the business, so you’re taxed at your marginal tax rate. Claiming business expenses will reduce your taxable income. Read more: How do the income tax brackets work and what is my marginal tax rate?

• A personal liability company (Inc), private company (Pty) Ltd, public company (Ltd) or close corporation (CC) is taxed in its own right at a rate of 27% and taxable income is reduced by business expenses. 

In addition, sole proprietors, partnerships, companies and close corporations with a qualifying turnover of under R1 million a year can qualify for turnover tax and qualifying small business corporations with a turnover below R20 million a year can qualify for small business corporation tax concessions. Read more: How do I declare business income for tax?

What are ‘expenses incurred in production of income’?

It is a wide definition but the general rule is that the expense has to be incurred in direct relation to earning the income.

So as an example, if you’re a freelancer working at your computer all day, you will not be able to deduct your car instalment and petrol as a business expense.

But if you have a small home repair business and need a vehicle to get your team to various sites, you will be able to claim vehicle-related costs.

Typical business expenses include:

Accounting fees

Website hosting and maintenance

Membership fees

Office rental

Stock purchases

Printing and stationery

Office supplies

Electricity and water

Insurance costs

Entertainment (of people significant to the business such as clients)

Staff salaries and training

Cell phone / telephone and internet costs

Depreciation on capital items such as computers

Cleaning and security

Marketing, advertising and promotion costs

Training costs

SARS also allows for depreciation on capital items purchased by the business, such as IT hardware, machinery or vehicles.

Expenses incurred to set up your business in the year before you started trading can also be claimed as a tax-deductible business expense.

A word about vehicles

It may seem like a great idea to drive a vehicle which your business pays for (a “company car”).  If you are an employee and the business buys a vehicle which you use personally too, you will pay tax on this fringe benefit calculated as the portion of your mileage which is for personal use.

If the vehicle is in your company’s name and the company is liquidated, the vehicle will be sold to pay your creditors.

If you own a vehicle and use it for business travel, your company could pay you a travel allowance. You can then claim business travel expenses as a tax deduction.

You need to keep an accurate logbook of your travel and expenses. This includes your kilometre reading on the first and last day of the tax year, the number of kilometres travelled for business and personal use, as well as the make, model, year and value of the vehicle. Business travel excludes travelling between work and home.

Loan account

You may feel tempted to pay some personal costs under the business banner, such as using a business credit card to pay for petrol or a family outing. Because these are not legitimate business expenses, you would need to keep a record of it in a loan account, to be paid back in future. Not doing so could be considered tax evasion. Be careful though, as this loan account could easily skyrocket, growing faster than the earnings of the business.

If you work from home, there may be some grey areas such as cell phone costs and even internet and computer equipment. A tax consultant would be in the best position to advise as each situation is considered on its merit.

Home office expenses

Apart from your direct day-to-day business expenses, you may be able to deduct your home office expenses if you work from home:

Rent or interest on your home loan

Rates

Depreciation on office equipment

Electricity

Maintenance (repairs – not cosmetic improvements)

Cleaning

Home insurance

To calculate the tax-deductible amount, you need to apportion these expenses based on the floor area of your home office, in relation to the property as a whole. Only the appropriate portion can be claimed. So if your home office occupies 12 m2 and your home is 130 m2, you can only claim 9.23% of the total costs. Read more: Can you claim a home office tax deduction?

Bear in mind that using your home as a home office and claiming tax deductions has capital gains tax implications when you wish to sell your house.

Keeping things simple

Keep accurate records of all business expenses, including invoices, travel costs and entertainment.

Keep invoices of capital items for which you want to claim depreciation.

Open a separate business bank account so it’s easy to track expenditure.

Ensure invoices are in the business name.

Use accounting software to automate your business finances.

Consult an accountant or tax consultant to ensure compliance.