What are expenses
Expenses are the costs you have in the day-to-day running of your business.
At tax time, your total profit (the amount you need to pay tax on) is your taxable income minus the expenses you can claim – so the more you can claim, the less tax you have to pay.
Business expenses are:
- day-to-day revenue expenses for running your business, like advertising or wages
- assets you buy, like machinery, computers or tools (these are called capital expenses).
If you're registered for GST, your income tax return will exclude GST on your income and expenses. GST is accounted for in your GST return. If you're not registered for GST, your income tax return will include GST on your expenses only.
Watch: How to claim business expenses
Transcript
[Visual: The video opens with a female presenter in a pink blazer against a blue background.]
When filing your taxes, it's likely your business will have expenses.
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Whether that's a business vehicle, an accountant, or your home office. You should understand what opportunities there are to erase the financial strain come tax season.
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Expenses describe how much you've spent on your business.
[Visual: The screen cuts to a cartoon man at a desk with a laptop. He has six arms extending out holding cash notes and coins are in the background. The right side of the screen shows the text “Pay as You Earn (PAYE). Either a system of income tax withholding by employers, or an income-based system for student loan repayments.” Which is credited to Investopedia. The screen cuts to a profile shot of the presenter.]
For PAYE incomes, there are a few deductions that you can make, including the cost of an accountant, income protection insurance, commission charged against your income, money borrowed to invest, and use of money interest paid to Inland Revenue.
[Visual: The screen cuts to an infographic by Inland Revenue and business.govt.nz. It is titled “Work from home? Make sure you claim these expenses”. The body text reads “If you use your home for business – whether you’re a contractor, sole trader, in partnership or own a company – you can claim a portion of household expenses. You can claim 100% of expenses that are solely for business purposes, for example, a business phone line. For the rest, you can claim the proportion of your house that you use for work. In this example, the house is 100 square metres and the office 10 square metres – 10% of the total area. So, the owner can claim 10% of expenses not solely for business, for example, a power bill. Whatever you claim, remember to keep a record of each item. The image shows a house with notes on each of the types of expenses you can claim.]
For business expenses, you can claim things if they help generate income for your business, and do not provide significant personal benefit.
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For these items, you need to have a record of the purchase.
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Most times, the line between personal and business expenses is clear.
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If you buy something to be used for your business, it's a deductible business expense.
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If you buy something to use privately, that's a personal expense.
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But sometimes there is overlap between business and personal. Such as a laptop that you use partially for business, and partially for personal use.
[Visual: The screen cuts to a man typing on a laptop in a café, then to a man using a laptop in an office.]
If this is the case, you can only claim a deduction for the amount that you use for business.
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So, if you use the laptop for business 75% of the time, and for personal use 25% of the time, you can only deduct 75% of the laptop.
[Visual: The headings “75% Business” and “25% Personal” appear on screen as the presenter speaks. “25% Personal” fades away leaving “75% Business” on screen. The screen cuts to show different expenses as the presenter lists them. First is an interior shot of a house living room, then to two plasterers working on an indoor building site, then to a man in a suit sitting on a couch, then to a pile of stationary, then a cooling fan on a PC, then to a laptop screen showing code, and finally to a group of people sitting around a table with the words “Digital Marketing” on a computer.]
Common expenses to claim include rent, subcontractors, accountants, stationary, computer costs, software insurance, and advertising.
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When it comes to home offices, you need to work off a similar principle to that used for the laptop.
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Work out the square meters of your house and then deduct your working space to find the percentage you can claim.
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You can do this for a garage storing work tools, or something of a similar nature.
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Portions of your rent, mortgage, rates, maintenance, and home insurance can be claimed.
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If you have a business vehicle, use a logbook to claim fuel expenses and claim a percentage for fuel, insurance, roadside assistance membership, and repairs.
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If you use a vehicle strictly for business use, you can claim all the expenses related to it.
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Note that expenses can only be claimed once.
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For mileage, consider the distance travelled and identify the portion used for business, and calculate this percentage, as the amount differs when a certain distance threshold is met.
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If travel is a big part of your business, a mileage claim may make more sense than an expense claim.
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To better understand your obligations and opportunities, chat to your accountant, or visit Inland Revenue's website.
[Visual: The screen cuts to a full page of Inland Revenue’s website showing the page “Types of business expenses”. The URL for Inland Revenue’s website appears on the bottom left “ird.govt.nz”. The screen cuts to a profile shot of the presenter.]
Take advantage of their resources, the user friendly RealMe interface, and get in touch with them if you are unsure about anything.
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Business expenses you can claim for
Business expenses can include:
- vehicle expenses, transport costs and travel for business purposes
- rent paid on business premises
- depreciation on items like computers and office furniture
- interest on borrowing money for the business
- some insurance premiums
- work-related journals and magazines
- membership of professional associations
- home office expenses
- work-related mobile phones and phone bills
- stationery
- work uniforms
- tax agent’s fees.
Investment property expenses you can claim for
If you own an investment property, expenses you can claim for include:
- repairs and maintenance (but not renovations that substantially improve the value of the property)
- professional services fees, like accountants, lawyers or property managers
rates and insurance - mortgage repayment insurance
- vehicle and travel expenses when you travel to inspect your property or do repairs
- depreciation on capital expenses, like whiteware, appliances or heat pumps
- legal fees involved in buying a rental property, as long as the expense is $10,000 or less.
How much you can claim
You can only claim 100% of the cost for an expense that’s entirely for business use.
If you have an expense that’s partly for your business and partly for your private use, you can claim the proportion that relates to your business.
Some things you can only claim half for - for example, some entertainment expenses like client meals and staff functions.
If you spend half the time driving a vehicle to deliver goods and the other half for your own reasons, you can claim 50% of the travel costs for your business.
Working from home
If you’re self-employed or run a business and have areas in your house set aside for work, you can claim a portion of the household expenses. For example:
- rates
- power
- house and contents insurance
- mortgage interest if you own the home
- rent if you are renting the home.
You must keep invoices for these expenses.
How it works
If your home is 100 square metres and your working space is 10 square metres – 10% of the total area – you can claim 10% of expenses that are not just for your business, like your home phone line.
If you aren't using a separate area of your home for business, you'll need to consider how much time you spend on your business and the area used.
If you're registered for GST, you can claim the GST content on home office expenses either:
- as they’re paid, in each GST return period
- at the end of your tax year.
Mortgage interest and rent don’t include GST.
How to claim expenses
Whether you’re a contractor, sole trader or running a business, you claim your business expenses annually in your tax return. Deduct expenses from what you’ve earned from your business during the year.
To claim an expense, you must have a record of that expense, or Inland Revenue may not allow the expense to be claimed.
At the end of the year, your business accounts will need to be completed, totalling up all your income and expenses. When you file your tax return, you’ll either:
- copy your income and expenses into your financial statements summary (IR10)
- send Inland Revenue a summary of your accounts.
Using an accountant or bookkeeper, or accounting software, can help you do your annual return correctly and claim the right expenses.
Keeping records
It’s easy to let filing and paperwork slip. But keeping good records makes it much easier to do your tax return, and will save you time in the long run.
Online accounting software services and mobile phone apps can help you record receipts and keep track of expenses.
You must keep your tax records for seven years. These must be in English, unless you get approval from Inland Revenue (IR) to use another language.
Common mistakes
Avoid these common mistakes when claiming expenses:
- Not separating your business and personal receipts – you need to know which ones to claim against your business tax return and your personal tax return (unless you're a sole trader).
- Getting rid of your receipts or invoices too soon – you must keep them for seven years.
- Not knowing what you can claim for.
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