10 Tax Saving Tips for Small Businesses
Starting up a small business is a huge achievement, but ensuring that your business is a success is a much bigger challenge. The start-up stage of business ownership is extremely risky, stressful and expensive and is where many entrepreneurs pull out. Making sure you get the right advice and making smart decisions about where to spend your money is the simplest recipe for success.
It is important to know where you can save money in order to invest that money back into your business and maintain cash flow. Chartered Accountants will make sure you are not paying more tax than you need to by structuring you correctly, making sure you are getting all the tax deductions you are entitled to and helping you plan for upcoming tax payments so that you do not get met with nasty surprises.
As the new financial year gets underway, here are 10 tax saving tips to keep in mind for your business.
Ensuring your business and personal affairs are structured into the appropriate legal structures is an essential exercise that should be reviewed periodically to ensure you are not paying more tax than you need to.
The type of legal entity you operate your business under will determine the rates that your business will be taxed at. The distribution of funds to you, the business owner, from your business will also differ according to the legal structure of your business. Your long-term goals for the business as well as your personal situation will be determining factors in selecting the appropriate entity under which to operate your new business.
Online accounting software packages such as MYOB Essentials, MYOB AccountRight or Xero can help you keep track of your business’s progress during the year, allowing you to monitor your profit and how much you should be putting aside for tax during the year. The beauty of an online accounting solution is that your accountant can have access to your file so that they can also monitor your progress, keep track of where transactions are being coded and make changes on an accounting level to ensure you are appropriately recording deductions which could reduce the amount of tax you have to pay to the IRD.
Utilising the cash flow reports from these online solutions will also allow you to monitor your cash flow position. Up to the minute, information can initiate discussions with your accountant relating to your spending or alert you when you may need to pay more attention to particular areas of your business, for example, high debtor days.
Online accounting software also has the added functionality of allowing you to file online to the IRD directly through the software, for example, the filing of your GST returns. This ensures accuracy and allows you to save time rather than having to duplicate information to the IRD. We all know time is money so any little bit helps!
Giles & Liew Chartered Accountants is passionate about digital innovation driving business success. If you are looking for accounting software for your business, fill out the form below so that we can contact you about your accounting software needs.
Appropriate tax planning gives you an indication of how much tax you have to pay and when you have to pay for it. The best way to make your tax payments is to plan ahead for them so you can pay your tax when it falls due. Paying in full and on time reduces the risk you will be charged penalties and ensures interest costs will be kept to a minimum. It is a good idea to use a separate interest-bearing account to put aside money to cover your tax and provisional tax payments, or other tax tools such as tax pooling.
Should the unexpected occur and you are unable to meet your tax payments on time, make sure you communicate with the IRD before the payment date in order to set up an instalment arrangement which will avoid unnecessary penalties.
Giles & Liew Chartered Accountants will work with you to understand the nature of your business and your business goals and advise you as to how much you should be putting aside to meet your tax obligations. We can monitor your results periodically and provide tax planning advice that takes into account changes in your business circumstances that may impact forecasted tax payments. We will remind you of your tax payment due dates during the course of the year to minimise any penalties or interest on late payments. Click here to contact us for more information.
As a small business owner, it is easy to get bogged down in tax issues and lose sight of your goals. Provisional tax helps you manage your income tax – the IRD requires you to pay your income tax in instalments throughout the year instead of paying a lump sum at the end of the financial year. However, during your first year of business, in many cases, you won’t need to pay provisional tax. Instead, your income tax will fall due once your total amount of tax for the year has been calculated. The danger for small business owners is that they do not appropriately plan for the double tax scenario that arises in their second year of business where they may find themselves liable not only for income tax relating to their first year of business but also for provisional tax for their second year of business.
An option available to business owners is to think about making voluntary payments to the IRD as they earn income, rather than leave this until it falls due. This gold nugget of advice could literally save your livelihood. Get in touch with us for guidance on meeting your tax obligations and for advice on whether making voluntary tax payments may be suitable, especially during your first year of business. Click here to contact us for more information.
To claim any deductions, you have to have proof in case IRD ask and the best proof is a receipt! If you do not keep copies of your receipts, you risk not being entitled to claim deductions for IRD purposes. Also, if you are registered for GST, you need a proper tax invoice for amounts over $50.
Of course, keeping receipts for an entire year is a hassle; many pieces of paper get misplaced or tossed. The good news is that there are options available to you now that means you no longer need to keep paper copies of your receipts! MYOB Essentials or AccountRight, for example, has an “Intray” built into its software which houses scanned or PDF copies of your receipts, matched up to the transactions in your bank feed. This way, you’ll make sure you obtain proof of, and retain that proof, for every expense deduction owed you.
That’s time and money in the bank!
Generally speaking, assets are regarded as capital purchases. However, assets which cost less than $500 can be claimed as an automatic deduction in the financial year in which they are purchased. This is $500 GST exclusive if you are GST registered, or $500 GST inclusive if you are not registered. The asset must, however, be used or available for use in generating income or carrying on a business to be able to claim an immediate deduction.
One area that small business owners become unstuck is when multiple low-value assets are purchased in one single transaction. Even if each individual asset falls below the $500 cost threshold, if assets purchased in the same transaction and are subject to the same depreciation rate all together total more than $500, then the assets will need to capitalised, no automatic deduction will be allowed.
Is your vehicle sign written? Can it be used to carry passengers or is its main purpose to transport goods? How much did you purchase the vehicle for? Who uses the vehicle? What is the business mileage? Is there any private use of the vehicle? Where is the vehicle stored?
These are the sorts of questions that your accountant will ask you in order to determine whether you should bring your vehicle into the business or keep it out. Work vehicles are always an area of much uncertainty. There are different methods of claiming deductions on vehicles used for business and discussing with your accountant the most appropriate way to deal with your vehicle can prevent costly tax penalties if the IRD were to do an audit and find you to have been claiming deductions for your vehicle where you should not have been.
If a portion of your home is used as an office, storage for business equipment or vehicles, or you conduct business from your home, you may be entitled to claim a portion of your home expenses as a business expense. Such expenditure that could be included in a home office claim could include mortgage interest, rent, power, rates, insurance. Whether or not you are entitled to claim on your home office will be determined based on a number of factors. It is best to discuss your situation with your accountant to determine your correct entitlement, otherwise, the IRD may disallow your claims.
If you are uncertain as to whether your business will make a profit or a loss for the year, the best thing to do is to be conservative with any wages you pay yourself or consider taking drawings instead.
In the case of many small businesses, a spouse or children will be helping with the running of the business, be it doing paperwork, paying wages, chasing up debtors, etc. that they do not necessarily get paid for. Consider putting them on a wage to remunerate them for the actual work they are doing.
Let us help you…
You don’t need to make small business ownership more financially draining than it already is. By carefully accounting for deductions throughout the year and investigating your options in tricky situations, you will find alternatives you didn’t know existed, resulting in tax savings you can really use. If this is an overwhelming task for you, please reach out to us. We would love to help you!
Giles & Liew Chartered Accountants will work with you to turn your vision into value. We will recommend and structure your affairs in a manner that balances your business and personal objectives together with your commercial requirements and the cost of compliance to ensure you are not paying more tax than you need to. We will help navigate you through the complex rules and regulations of the New Zealand tax system and advise you as to the best options available throughout the course of running your business.
For more information about why you may need the services of an accountant, refer to the article below: