Many of the business expenses you face can be deducted from your income when calculating your tax bill. Here are steps you might be able to take to reduce the amount of tax you need to pay.
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Your tax bill is calculated on your net profit. You can reduce your tax bill by claiming as many valid business expenses as you can. You’ll need to keep good records, eg receipts and log books, and hold onto them for seven years — Inland Revenue will need to see these records if you’re audited.
Consider hiring a tax agent. Their knowledge could save you time and money.
This avoids any risk of having to paying interest or penalties.
If you’re worried you may miss a payment date, call Inland Revenue on 0800 377 772 to discuss what support might be available.
DO NOT pay tax late. Penalties might be more than what you owe.
DO NOT overpay tax. Refunds include interest, but at a lower rate than you’ll get in a savings account.
Each tax year ends on 31 March and starts 1 April.
At tax time, your total profit (the amount you need to pay tax on) is your income minus the expenses you can claim — so the more you can claim, the less tax you have to pay.
Many of the costs involved in running a business can be claimed. You might be able to claim some household expenses if you work from home.
DO NOT claim full travel costs if your trip mixes work and personal time. Only claim the business portion.
Claim full running costs if the vehicle is used strictly for business. If it’s your own vehicle, you can still claim running costs for your work use.
Work out your business use by either:
DO NOT claim costs on your GST return if you use the Inland Revenue mileage rate.
Mileage rates(external link) — Inland Revenue
“In my experience small businesses want to pay the amount of tax that they have to pay but no more, no less,” says tax expert John Shewan, formerly of PwC.
There are legitimate ways to minimise the tax you pay, he says. How best to do this will depend in part on your business structure — sole trader, partnership or company.
“Make sure your business structure lines up with you own personal family circumstances and with your commercial objectives. What I mean by that is you don’t want to rush off and form a company unless you really have to. It may well be best just to operate as sole trader.”
Make sure you claim all the business expenses you’re entitled to, and also consider how you structure your debts — interest from business loans is tax deductible.
“One of the most common mistakes I see small businesses making is to have their own private debt against their property [eg a home mortgage], but they have equity, their own money, tied up in their business.
“They’re better to try and structure that in a way that ensures they match their borrowings against their business assets and can deduct the interest. That can save them up to a third of the interest cost.”
And keep good records of what you spent the money on for your business.
Depreciation is a way of claiming back some money on assets you buy for your business, like computers, vehicles or machinery. You claim for the amount it depreciates each year — that is, the value lost through wear and tear or becoming out of date.
Claiming depreciation is generally compulsory — tell Inland Revenue if you decide not to for a particular asset.
Depreciation rates guide (IR265)(external link) — Inland Revenue
DO NOT forget to keep clear records if an asset is used privately and for business.
Depreciation(external link) — Inland Revenue
If your business makes a charitable donation, you can deduct the amount of the donation from your income.
How to claim tax credits for donations(external link) — Inland Revenue