Sole trading is the simplest form of business structure. Not only is it relatively easy but it requires a low cost to set up. Being a sole trader, you must have in-depth knowledge of what you can claim as expenses. This will help you avoid a large tax bill when tax payments are due. One of the benefits of being a sole trader is that you are taxed as an individual and pay income tax at personal rates.
The good thing about business costs is they can be claimed as expenses, which means you will not be charged on these purchases, and that automatically lowers your tax bill. This means that if your expenses are directly related to your business and are earning you assessable income, they can be claimed as deductibles in your personal tax return.
Next, we provide a top 10 list of expenses you can claim as a sole trader that you may not be aware of:
1. Car/Truck expenses: Cars and trucks are widely used by small businesses. The cost of using a vehicle is deductible if there is evidence to prove the number of times it was used. You should also have a record of the cost of petrol, gasoline, and oil changes.
2. Legal and Professional fees: Most small businesses usually require the services of an accountant or tax preparer for financial data collection, analysis, and report generation. Some parts of the fees can be claimed as expenses if they are directly related to the business.
3. Advertisement & Media Promotion: The cost of hiring a graphics designer for the branding of goods, designing logos or the cost of promoting business flyers on websites are totally deductible.
4. Bank Charges: It is always better to have a separate business account. Monthly credit charges or transfer fees are deductible since it is the business’ account.
5. Operational expenditure: These are costs used to run the day-to-day affairs of the business. They include rent, repairs, and taxes.
6. Interest: Interests on loans taken out for the business are 100% deductible as long as you are legally liable for the debt.
7. Rent expense: If you rent a building or material for business purposes, the rental payments are deductibles.
8. Wages & Salaries: The salaries paid to employees are tax-deductible as long as the employee is not the sole proprietor and there are records that show the employee provided service for the month or payment period.
9. Travel expense: All expenses incurred during travelling from flight tickets to taxi fares are 100% deductible and can be claimed as business travel expenses provided you have receipts for your trip.
10. Telephone and Internet expenses: Telephone and internet bills are usually quite large when you calculate them at the end of the month. The good news is they are deductible and can be claimed as expenses provided they are used for the business. It is advisable to use a land line or separate lines for your business and also keep your recharge vouchers or itemised bill to prove business use.
Asides all of the above, it is best you track all expenses and keep proper records with your accountant to ensure you are taking advantage of every deductible you can get your hands on. Tax deductions are important if you want a huge reduction in the amount of tax you have to pay. Also, good books and record-keeping will help you keep your deductibles when the authorities come knocking.