Small Business

Small business tax advice– Gearing up for tax time.

As accountants celebrate the arrival of busy season, 30 June for most small business owners is a time of dread. They may realise they haven’t put enough time and effort into their bookkeeping throughout the year, and then like cramming for an exam try to rush through to get that pass from the ATO. Others would rather have dinner at the in-laws then set aside a couple of hours to fulfill their tax obligations. But most agree if it’s a choice between sitting in traffic for hours or doing your tax. Tax time wins hands down.

So here is some small business tax advice and points, that will help clarify a few issues I have come across through my years as an accountant, that can sometimes confuse small business owners:

You may only get a tax refund if you have paid tax throughout the year.

This one may seem straight forward to a lot of you. But for those that don’t have a business background, or an understanding of the tax system, tax time leads to some confusion about who is entitled to a tax refund. We hear all the ads on the TV and on the radio, H&R Block are going to maximise our refunds! But what they fail to inform us during these ads is that you may only get a refund if you have in fact, paid tax.

So to clarify, if you have paid PAYG throughout the year, either through voluntary payments, through installments or, through your employer, only then, may you be entitled to a tax refund.

The up to $20,000 small business asset write off.

OK so this one seems great, and for a lot of small businesses it is. But, only if they have a turnover that makes purchasing the asset worth the write off. I’ve heard time and time again “I’m gunna go buy, a new car, or a huge piece of equipment, etc, so I can write it off on tax!” But no consideration is given to the level of turnover being made to justify the purchase.

The entitlement itself is for small businesses with an annual aggregate turnover of less than A$10million. (Aggregate turnover includes turnover of the business and the annual turnover of any affiliates or connected entities.) And, is for the purchase of assets up to $20,000. (So this could be broken into a number of smaller valued assets, with a total purchase value of $20,000.)

Now from my experience, there are a large amount of sole traders out there that only have a turnover of $50,000-$100,000 and sometimes even less. So although the $20,0000 small business write off sounds like an AMAZING benefit to have, it really does depend on the size of your business, the turnover you are making, and the purchase value of the asset you are looking at buying.

Say you are one of these smaller small businesses with $100,000 in turnover. You would need to weigh up the pros (the write off) and the cons (cashflow impact) of spending 20% of your turnover ($20,000 asset). Is it worth it? Does your business need the asset you are looking at buying? How much more income will that asset produce for your business? Can you and your family survive if you spent up to $20,000 of your cashflow on the asset?

So yes, the small business asset write off sounds fantastic, but as individual business owners you need to assess the full impact purchasing the asset will have on your business, and if the benefit will actually be a tangible benefit to the business, or will it put more cashflow pressure on your situation.

Don’t procrastinate about tax time.

I know a lot of small business owners who put off their tax obligations and then when the time comes to crunch those numbers as 31 October looms, they tend to have a crack at it themselves with no external support.

Don’t do this!

Know your strengths and limitations. If you don’t know what you are doing, then ask for help, engage an expert.

“Tax time can be intimidating for anyone but for small businesses,” said Matthew Prouse, Head of Industry at Xero Australia. “When you aren’t a finance expert (and most small businesses aren’t), decoding tax jargon to understand business obligations can feel overwhelming…However, the more a business procrastinates from taking a good hard look at the numbers, the more challenging tax time can become – and the more surprising the final result often is.”

I know I sound like a school teacher, but don’t leave it to the last minute. It will only cause more stress, and increase the potential for mistakes. Assess your situation early, and engage an expert if you need help. 98% of small business owners said seeking support through a qualified accountant or tax professional made tax time much less stressful for them.

So if you don’t know what you are doing, don’t do it. It’s not worth it in the long run.

Cashflow and budgeting.

Cashflow is the biggest catalyst of small business failure. Figures show that in FY17/18 over 50 per cent of small businesses started the year with a negative cashflow balance.

So make sure you are budgeting and revising on a regular basis, and apply this to your personal life too.

A simple spreadsheet is sometimes all you need to have everything laid out in front of you and show you the trend of what the next few months are going to look like. Budget for your incoming cash, say on a weekly or monthly basis, including sales, wages, or whatever is going to hit your bank as cash coming in. And then project your expenses based on historical out goings deduct your payments out (lease payments, insurance, payroll, purchases etc.) Also on a weekly or monthly basis. This will give you a high level expectation of what your cash deficit or surplus will be for the period.

And if you are expecting a tax refund budget for that cash injection, vice versa if you are expecting to pay tax, make sure you include that tax debt in you projections. This will make sure you can forecast longer term, rather than running your business hand-to-mouth.

Prepare, don’t stress, ask for help!

I know tax time can be stressful, but if you plan ahead, assess your situation and engage a professional before you are out of your depth, it will be worth it in the long run. Feel free to leave a comment below or email me at nicole@mumsonline.com.au if you want help finding an accountant or a point in the right direction.

 

Looking for some extra deductions, click on the pictures below for a couple of options which may apply to your business:

    

 

 

 

 

 

15 Comments

  • Jenny

    Your article is great! I just started an online business and I’m getting terrified of the taxes or the legal staff. So probably I’m gonna follow your advice and go to a professional.
    Thanks a lot!

    • Nicole

      Best of luck Jenny, and thanks for your comment. Always good to seek help from a professional before you get stuck!! Goodluck with your online business and feel free to check out my other articles. 🙂

  • Robert M Doyle

    It is nice to know about the small business write-off. the details about what we can do as a small business was surprising. It is something we need to constantly be in the know about because tax laws seem to be constantly changing. thanks for sharing this.

    • Nicole

      Thanks for your comment Robert. It is constantly changing isnt it?! And staying on top of it can be hard when there is so many things to juggle as a business owner.

  • Melinda

    These are great recommendations. I have started doing affiliate marketing and will soon need to figure out the taxes for that. Do you have any tax recommendations for affiliate marketing businesses? What can we write off?

    • Nicole

      Hi Melinda, thanks for your comment. Tax is such a broad topic, and what would be advice for one person may not be right for another, so best to personally email me with your questions and I would be happy to reply. Are you based in Australia? Affiliate marketing offers so much freedom and I absolutely recommend it.

  • Jimmie

    Great advice. Thank you. I plan on starting a small business in my next chapter. I think that budgeting for a good accountant would be a smart move for me.

    • Nicole

      Thanks for your comment Jimmie, best of luck with your next chapter and always seek out advice when you need it! Feel free to email me if you want to bounce any ideas off me. 🙂

  • Wendy

    Really great advice here Nicole. Tax time freaks me out and I’m rubbish at keeping receipts or knowing what I can claim…I really should get more professional advice next time – thank you!

    • Nicole

      Thanks for your comment Wendy, I know tax time can be super scary for some, but if you get the help you need before things get stressful you will fly through it no worries. Best of luck with your taxes. 🙂

  • nikolina

    Great article – I’ll be starting a small business very soon, and I already feel lost with all the rules and regulations. If things go wrong I can’t just say “sorry I didn’t know what to do”, I wish I could 🙂
    Anyhow – I’ll be contacting you for a specific advice. Thank you for the info.

    • Nicole

      Thanks for your comment nikolina, how exciting to start your own venture. I look forward to hearing from you, and goodluck with the start up phase. 🙂

  • Stefan

    Hi and thanks for all this info.

    I am actually from Switzerland and the time I had my small business there I always worked with a professional accountant.

    This would cost me a fixed rate every year but saved me a lot more than I paid.

    I had to collect all expenses proof and then I added them up and gave a little bit more worth of income proof. Like that, I had almost no taxes to pay 🙂

  • Garen

    One of my least favorite part of the year is tax season. Not really. I typically just have all my business and personal taxes done for me. I just use Excel to put all my income/expenses and send it over to my accountant.

    I was unaware that you can only write off $20,000. Is this a state law or federal law? I live in Missouri and have in business in for 10+ years now.

    • Nicole

      Hi Garen, thanks for your comment. So good to hear you have everything in order, and excel is an excellent easy to use tool to keep on track of everything. The $20,000 small business immediate tax deduction is a federal ruling in Australia and therefore wouldn’t be relevant to your jurisdiction. This is rather than having to depreciate over the relevant period of the life of the asset. Do you know what the rules surrounding depreciation of assets in your state? Thanks Nicole

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