The expense claims available as legitimate deductions to a self-employed or business taxpayer are dependent on the purpose of the expense, the type of business you have and the circumstances or conditions applying that require the expenditure to be made.
It is impossible to cover every conceivable allowable expense, even in a section ten times this size. Nevertheless we have compiled a list that covers most of the deductions applicable to most businesses and it is up to you to see what relates to your type of business and make your claims to suit.
This section is mainly applicable to those:
- in business on their own account as a sole trader or partnership
- in business under a company or trust structure
- with income where tax has not already been deducted or paid
- with commissions or other income not yet taxed and where expenses relating to their work have yet to be claimed
The more common expenses which require further explanation have been outlined in detail in the next sections.
It is a good idea to make the “expenses-claim headache” into a game. Sit down with pen, paper, spouse and dog and jot down every conceivable expense that you incur in earning your self-employed or company income. Let yourself go and allow your imagination to run riot. You may be pleasantly surprised.
Remember, you can claim whatever expense it costs you to earn your income. It is irrelevant that no one has ever claimed that particular expense before.
You are limited only by your imagination – with the proviso of course that everything you put on the deductions list is genuine and correct and actually incurred by you or your business to earn income on which tax will be levied.
Inland Revenue is the agent for collection of the employee’s Earner Levy as part of your PAYE deductions. These levies provide insurance cover when people suffer an accident outside of their work.
The Test – allowed as a deduction or not?
The test of deductibility requires the expenditure to be either:
- Incurred by a taxpayer in deriving their gross income.
- Necessarily incurred by the taxpayer in the course of carrying on a business for the purpose of deriving income.
- The expenses must not be of a private or capital nature, otherwise they are not deductible.
- Any expenses that are partly business and partly non-business must be apportioned accordingly.
From an examination of the Acts, as well as relevant court cases, it would appear that it is not necessary for the taxpayer to show that the expenses were incurred for the purpose of gaining an income.
It is sufficient for the taxpayer to show that the expenses were incurred while producing the assessable income and that it was reasonably incidental and relevant to deriving it.
What qualifies as a business expense?
You pay income tax on your net profit for the year. To work out your net profit, deduct your business expenses from your income for the year.
You can claim a wide range of expenses that you incur as a result of operating your business, provided you keep sufficient records of your purchases during the year.
Some commonly claimed expenses are:
- Motor Vehicle Expenses – keep a logbook to record how much the motor vehicle is used for business purposes, and how much for non-business travel
- Use of Home expenses – related to use of your home where you use it for business. You may claim a proportion of your rates, house insurance, power and mortgage interest, based on the proportion of the area in your home that is set aside for business
- Rent – if you pay it for your business premises – you may also claim power, phone and other expenses for these premises
- Supplies for the business – e.g., stationery and other office supplies, raw materials, stock purchases
- Travel Expenses for business-related travel. Record your travel details in a diary and keep invoices and tickets
- Premiums and Levies – for accident insurance and ACC cover
- Gross Wages – to employees and fringe benefit tax if you pay these
- Entertainment Expenses – for entertaining staff and clients. Some expenses are 100% deductible while others are 50% deductible.
You cannot claim the cost of fixed assets (i.e., business assets that you expect to use for more than a year) as an expense against your income. Instead you claim depreciation on most fixed assets.
Business – common expenses listed
The following summary shows the more common expenses of a business whether the taxpayer is self-employed or is in partnership or even if operating as a limited liability company.
Study and extract the likely items which apply to you. Whether you are in business on your own, fulltime or merely carrying on a part time business in the basement of your home, the following expenses will generally apply to you. It is important to emphasise again the need for proper and full records to be kept in the way of bookkeeping books, invoices, statements, receipts, agreements, papers and other documents. Without these it will be very difficult for a proper statement of true income and expenses to be ascertained.
All taxpayers in business should not attempt to handle their own accounting unless they have some knowledge or experience. This is a specialised function and only your professional tax adviser with the qualifications and knowledge can really carry out this work in a professional manner.
The criteria for expense deductibility
In general you can claim any cost whatsoever that is related to and necessary for earning or generating the income on which your sole trading business will be taxed. The criteria is not whether the costs is one that others have claimed in the past or whether it’s generally allowed by IRD – the criteria is whether the cost you incur was necessary for generating your income.
That is it – period.
No one else need ever have claimed that particular expense themselves – ever.
Some more common business expenses include:
- Accommodation Expenses
- Accountancy Fees
- Advertising & Promotion
- Audit fees
- Bad debts
- Bank Charges
- Cartage costs
- Clothing – Protective
- Commissions paid
- Conference expense
- Courses – Refresher
- Direct wages
- Director’s Fees
- Discounts allowed
- Distribution costs
- Equipment lease or hire
- Freight – cartage
- Fringe Benefit Tax
- Fuel and Oil
- General running expenses
- Heat, light and power
- Hire costs
- Hire Purchase costs
- Hotel and Motel accommodation
- Lease payments
- Legal Expenses
- Loss on sale of assets
- Office in House
- Overseas travel
- Parking fees and bridge tolls
- Periodicals and magazines
- Printing and Stationery
- Protective gear
- Purchases – materials
- Rebates and discounts given
- Registration fees
- Repairs and Maintenance
- Storage expenses
- Super Fund (employer portion)
- Taxation Fees
- Telephone and tolls
- Tool replacements
- Tools of trade
- Travel expenses
- Use of house or flat
- Use of private vehicle
- Vehicle expenses
- Warrant of fitness
- Water rates
Companies – claiming deductions for donations to donee organisations
A donation is an unconditional gift only if the giver receives nothing in return.To work out the income tax and GST treatment of a donation you first need to know whether the donation is an unconditional gift, or if it’s really a payment in exchange for something of value. If a company makes a donation to a donee organisation it can claim a deduction. The maximum deduction it can claim is limited to the amount of its net income, calculated before taking into account the deduction. All close companies also qualify for this deduction. Companies need to show the donations amount in the IR4 tax return in the area provided.
GST and donations
Even if you’re registered for GST you cannot claim GST input tax for any donations you make. GST is claimable on supplies purchased as part of your taxable activity, but your donation doesn’t purchase any supplies. However, if you’re registered for GST and you purchase supplies from a donee organisation which is also registered for GST, the donee organisation will charge you GST on your purchase. In this situation you could claim a GST input tax, but the purchase wouldn’t be a donation.
What expenses can salary & wage earners claim on tax?
This is the most common question asked not only by company owners and the self-employed but also people on a PAYE salary.
The bad news is that if you are on a PAYE salary there’s very few expenses you are able to claim.
They are limited to the following PAYE salary expenses:
- Income protection insurance premiums
- Interest expense on a loan use to purchase income earning investments like shares
- Some portfolio management fees that you have paid someone else to manage your investments
- The fee paid for preparing your income tax return
- Charitable donations (claim on a donations rebate form)
What expenses can the self-employed claim tax?
For self-employed people and businesses the options are a little broader.
The expense needs to be directly related to earning your income (the technical term being a “nexus” between the expense and your income).
Business expenses you may be able to claim include, but are not limited to, the following:
- ACC Levies
- Accountancy Fees
- Bank Charges
- Car Parking
- Consultancy Costs Entertainment Expenses (see our earlier blog post about these)
- On-site meals (no alcohol involved)
- Credit card fees
- Credit card commission
- General Expenses
- Insurance – Professional Indemnity, Insurance of business assets
- Legal Costs
- Life insurance – Key man
- Mortgage Insurance (in certain circumstances)
- Motor Vehicle Expenses
- Postage & Couriers
- Printing & Stationery
- Rental cars
- Repairs & Maintenance
- Seminars and conferences
- Telecommunications and Internet
- Travelling Expenses
- Travel to work (if you don’t have a dedicated place of work)
- Use of Home as Office (claim based on % area of office verses home area)
The above list is of the most common expenses and not is an exhaustive list.
Whether any of the other expenses are claimable, or an expense that is not listed, will depend on your personal circumstances – contact your accountant if you’re unsure.