Tax deductible expenses for a business
Tax deductible expenses are those costs that you can subtract from your income before calculating how much tax you owe based on the business profit.
However, not all expenses are tax deductible. The general rule is that an expense must be incurred in the production of income and not be of a capital, personal or domestic nature. Section 11 of the Income Tax Act lists some specific expenses that are allowed or disallowed as deductions.
Some examples of tax-deductible expenses for small businesses are:
- Rent for business premises, all purchases or cost of goods that will be sold again.
- Salaries and wages for employees
- Interest on business loans
- Advertising and marketing costs
- Accounting fees
- Travel expenses related to business activities
Some examples of non-tax-deductible expenses for small businesses are:
- Fines and penalties imposed by law
- Donations (except those approved by SARS)
- Entertainment expenses (except those for staff welfare or promotion)
- Personal expenses such as groceries, clothing or medical bills, private travel,holidays.
To illustrate how tax-deductible expenses work, let's say your business has an income of R1,000,000 and total deductible expenses of R700 000. This means that your taxable income is R300,000 (R1,000,000 - R700,000). The business will pay tax on R300,000 according to the applicable tax rates.
It is important to keep accurate records of all your income and expenses and to have supporting documents such as invoices or receipts for every transaction. This will help you to claim all the deductions you are entitled to and avoid paying more tax than necessary.
However, you should also be careful not to claim deductions for expenses that are not allowed by law. This could result in penalties or audits from SARS if they find out that you have overstated your deductions. You could also face criminal charges if you intentionally evade paying taxes.
One common misconception is that having an invoice in the company name automatically makes a tax-deductible expense This is not true. An invoice is just one of the requirements to prove that an expense was incurred. The expense must also meet the criteria mentioned above: it must be related to your business activities and not be personal or capital in nature.
E.g., buying a TV for your home bar, but having an invoice in your company name doesn't make it a deductible expense.
Expenses of a capital nature are those that relate to acquiring or improving long-term assets such as buildings, equipment or vehicles. These assets have a useful life span of more than one year and provide benefits for future periods. Capital expenses cannot be deducted fully in one year but must be written off over time through depreciation.
If you have any questions about what expenses are tax deductible for your specific business or industry, please contact us, will be happy to advise you on how to maximize your tax savings while complying with the law.