What can I claim as a tax deductible when I am in business?

Apart from a few special rules, any cost necessary to run your business will probably be tax deductible. 

However, there are a few things to be aware of – some items that you might assume could be claimed can’t be, and conversely, there may be others you didn’t realise are legitimate expenses.

General

If you have “incurred” an expense, you can claim it, even though you might not yet have paid it. Note that some costs that provide future benefits, like insurance, may not be fully claimable in the year incurred. 

Inland Revenue may not tell you how to run your business. If you want to run a Mercedes car, it is your choice. You cannot be told a cheaper car will do the same job. However, if the expense has a personal flavour about it, such as a couple going out to dinner and calling it a directors’ meeting, you will not be allowed to claim the cost. 

Business versus private expenses

Some payments appear to be necessary for business but are deemed private. Here are a few examples:

•  Travel from home to work and back

•  The clothes you wear to work unless they are protective clothing like overalls for a painter and sneakers for a roofer. To qualify, the clothes have to be subject to undue wear and tear or of a specialised type – not normal apparel. For example work-boots, overalls.

•  Socialising with mates in a pub

•  Spectacles

•  Costs of getting into business, such as a lawyer’s bill and the cost of creating a limited liability company

•  Usually, the cost of taking your non-working partner on an overseas business trip

•  The costs relating to installing new machinery, including travel to go and evaluate it

•  The debt repayment portion of hire purchase, finance lease or other loans

The above costs are either considered to be personal or costs to put you in a position to do business, as opposed to actually doing it. 

Expenses which have an ongoing benefit to the business over a period of years are “fixed (or non-current) assets.” You can only claim a proportion of their cost each year, known as depreciation.

Use of home

If you use part of your home for business, IRD will accept a claim for a portion of the costs. The portion is work out as a percentage of the total home. For example, if the home office is 9m2, and total home is 100m2, then the portion of costs will be 9%. The standard costs would be:

•  Rates

•  Insurance

•  Interest on mortgage

•  Repairs and maintenance

•  Power

A few things to note:

  • If the business uses the garage, include this as part of the area used for business
  • Substitute rent for interest on mortgage etc, if you do not own the house
  • Keep supplier tax invoices
  • You can also claim GST on the business share of these costs
  • If your business is a company, the home office-related bills will not be made out to it. In this case, claim reimbursement from the company because you are one of its employees.
  • Generally, where income is only interest and dividends, there is no claim for use of home to run your investments.

Motor Vehicle expenses

Sole Traders and Partnerships

In order to clearly establish the apportionment between business use and private use, you need to run a logbook. Based on the logbook, there are two options that can be used for the calculation: the cost method based on actual costs, or the kilometre rate method.    

Cost method

Under the cost method, you claim a deduction based on the business proportion of your actual motor vehicle costs. 

For example, a business owner collects all the receipts and invoices related to motor vehicles expenses (including registration and insurance etc), which total to $12,500. Based on the logbook, 60% of the vehicle’s use is for business. So, the calculation will be:

$12,500 x 60% = $7,500  

Therefore, the total to claim is $7,500. 

Kilometre rate method

Under the kilometre rate method (also often referred to as “mileage”), you are required to keep a logbook for at least 90 consecutive days to determine the proportion of business use versus personal use. This is then applied for a term of up to three years.  

You must make an election to use the kilometre rate method. Once the election is made, it is irrevocable, and the kilometre rate method must be used until the vehicle is disposed of. In other words, you cannot switch between the kilometre rate and cost methods. 

It is important to note that without the election, you are deemed to have chosen the cost method. 

Two tiers of rates for the kilometre method

There are two tiers of rates for the kilometre method.  

•  Tier 1: 82 cents per kilometre for the first 14,000 kilometres related to business use. 

•  Tier 2: Over 14,000km, the rate per kilometre drops significantly to 28 cents.

**Note the per kilometre rate changes regularly – check the IRD website for the latest rates. 

Example: A car is used for business and private use. The logbook shows the car is used 60% of the time for business purposes, and travelled 20,000 kilometres for the year. So the calculation will be: 

14,000km x 82 cents x 60% = $6,888 

Plus (20,000 – 14,000) x 28 cents x 60% = $1,008

Therefore, the total to claim is $7,896

What if I don’t keep a logbook?

If you don’t run a logbook, then deductions are limited to 25% of the use of the vehicle. So for the cost method, this means you can claim 25% of your actual costs. 

For the kilometre rate method, you can only apportion a maximum of 25% of the kilometres travelled to business use, with the same tier rates applying. This means that without a logbook, Tier 1 equates to the first 3,500 business kilometres (14,000 x 25%). 

Example: To illustrate, we’ll use the same circumstances as in the example as above, i.e. the car is used for business and private use and travelled 20,000 kilometres. At least 25% (or 5,000km) was for business, but this time, no logbook was maintained. Now the calculation looks like this: 

3,500km x 82 cents = $2,870

Plus (5,000km – 3,500km) x 28 cents = $420

Therefore, the total to claim is $3,290.

By not keeping a logbook, in this instance, you miss out on a claim of $4,606. 

In summary, if your business use is more than 3,500km per year, it is well worthwhile keeping a logbook for the first 90 days to be able to claim the full deduction you are entitled to.  

Companies
Ordinary companies with five or fewer shareholders have different rules that they are required to follow in relation to motor vehicle expenses. 

Fringe Benefit Tax

Fringe benefit tax (FBT) must be calculated and paid to the IRD if a company’s vehicle is available to employees and/or shareholder employees to use privately, even if they do not actually use it. The FBT regime is complicated to follow, especially in relation to the quarterly calculations and annual FBT reconciliations, so seek help from a qualified accountant. 

If the vehicle is temporarily unavailable for private use (for example, being repaired), or it was used for an emergency call, then it is exempt from FBT during that period. 

Exemptions from FBT

Fringe benefit tax does not apply if you notify your employees in writing that the vehicle is not available for private use, except for travelling between home and work and travel related to the business (e.g. detouring to the post office for business related matters on the way to work).

To be exempt from FBT, there should be a separate document outlining the conditions, which is called a restrictive use agreement. Please get in touch with us if you need one.  

Cost or kilometre methods for companies

Close companies are also allowed to use the cost or kilometre rate methods as an alternative to paying FBT, provided that the vehicle is the employee’s only non-cash benefit. The election should be made via the company’s tax return and once it is done it cannot be revoked.

Telephone/ Internet

Unless you keep records to show the contrary, IRD allows you to claim half domestic telephone rental/internet for business if the phone/internet is used for both private and business, so long as the business element is reasonably significant.

Entertainment

This is complicated. If you want full details on claiming entertainment, you can get a booklet from IRD

Interest

Interest is generally tax deductible. However, borrowing to buy real estate can be tricky, as there are new rules surrounding interest deductions for residential investment properties.

Business Expenses

Don’t be tempted to pay yourself an expense allowance. IRD gets concerned that not all of it will be spent on business costs – they prefer actual expenditure.

If your business is a limited liability company, an expense allowance may be permissible on the basis you are an employee of the company. You need to discuss this with your accountant before you determine the amount of the allowance.

If you need cash for parking meters, keep a float in the car and draw cash to top it up from time to time as needed. Try to keep some evidence to show the money was really spent on parking. (You can only do your best.)

Pay as much as you can through your business bank account. For other small petty cash items, keep a notebook. Record the date, nature of cost and amount. Keep supporting receipts where you can. When the business owes you a reasonable amount, get reimbursed from the business bank account and record this in your notebook.

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