Slash Your Taxes – Converting Private Expenses Into Tax Deductions
The IRD think that those in business get away with murder by claiming all sorts of expenses that are denied to those in a job. Leaving aside the fact that those taking the risks of fueling the economy, paying business taxes and creating jobs deserve something in return, if they think that (and they do, as one IRD official told me this the other day) you may as well do your best to live up to their expectations! Here are six easy ways to convert what are normally private expenses into legitimate tax deductions:
- Interest/Finance Charges. Many business owners have no business borrowings but large mortgages or private loans, overdrafts or credit card debts. Most also have invested large sums of money in their businesses and where they operate through a limited company, typically the company owes them a substantial amount of money by way of an advance account. All you have to do here is re-finance your advance account and use the proceeds to pay off your private loans or debts. As any interest paid by a normal limited company is tax deductible hey presto, you’ve now reduced your tax by a lot! There are a couple of other variations too you can use if your circumstances are slightly different so just give me a call to discuss your specific circumstances.
- Travel. The key to success here is the purpose and motive for your trip. If the primary purpose of your trip is for business, and any holiday aspect incidental, then you would be able to claim 100% of the cost of the trip (providing you paid for the accommodation, food and any activity costs yourself on the non-business days). If, on the other hand, there are two purposes for the trip, business and a holiday, then you would need to apportion the cost of the airfares/hire car etc. There is a third potential purpose, where the primary purpose of the trip is a holiday and the work aspect is incidental. Here, there would be no deduction for the airfares/hire car but you could claim for the accommodation and meal costs on the business days. With a little forethought and planning, many trips can be built around a business purpose – conferences, fact finds, checking out the competition, and looking for new suppliers to name a few – even the whole purpose of the business (like UK clients of mine who used to travel around the world every year on a round-the-week air-ticket with unlimited stops) can be designed around tax-deductible travel!
- Motoring Costs. In these days of high motoring costs a little subsidy from the IRD could come in handy. There are many options and it depends on what business entity you operate, your private v. business mileage, whether you work from home, have another car available, how expensive your vehicle is and how you work or operate, but either which way there is normally scope to get some GST back or a tax subsidy on your running costs or depreciation. There are also a lot of myths and half-truths floating about out there, and worse, many business owners (often, I’m embarrassed to say, encouraged by their accountants) stick their head in a bucket of sand and just ignore all the rules, so if it sounds too good to be true, it probably is! Seek advice from a practical accountant who isn’t afraid to tell you what you can & cannot get away with!
- Use of Home. Just about the biggest grey area of tax, those with high outgoings e.g. a substantial mortgage, can reduce their taxes significantly if they work from home and even if they have business premises but still work from home by a little. How much of your home do you use for business? A dedicated office and/or workshop? Your garage or sheds for a business vehicle or for storage? Toilets, kitchens, hallways or dining rooms for both business and domestic purposes? Maybe even a bedroom if you’re in the right business? Do you have a cleaner or gardener to keep things looking spruce for visiting clients or customers? Sometimes it’s obvious and sometimes a lateral approach is required, as often. For example with mortgage interest or rent, rates, power, repairs and maintenance the tax saved can be huge. Sometimes it’s a smaller saving that you make each time but that will add to quite a bit if you do it consistently, like claiming for a portion of your refuse cost (either the service you pay for or the orange sacks you buy).
- Entertaining/Meals Out. A 50% deduction is better than nothing! Providing there is a clear business motive and you keep good records e.g. identifying the individuals entertained you can claim for corporate boxes or marquees including entry costs at outside events, accommodation, pleasure craft and food and drink or coffees.
- Sponsorship can be a good way to get a tax deduction for your hobbies or interests, providing there is a clear intention to promote your business and you are not gifting the money, as otherwise it will be a donation or gift and not sponsorship where no deduction can be claimed. You will need to show a real connection between the outgoings and your business in terms of the benefits to your business and how it is heavily and effectively promoted. The expenditure should also be part of your overall marketing strategy and ideally, related to your actual products and services. If you get it right, any private benefit you receive will be incidental and therefore ignored. As always, seek advice from a good accountant who will always tell you what you might not want to hear!
Tax is tax and a necessary evil, but why pay more than necessary? If you need help to reduce your tax bill contact Nick on 0800 ASK NICK or email firstname.lastname@example.org. If you’ve gone to all the trouble and expense of being in business you may as well maximise your returns!