Countdown to tax time: review expense accounts
There are only a few more weeks until the end of the taxation year… Does the following scenario sound familiar?
You have sent off your business accounts to your accountant to prepare your year-end tax engagement. Based on your profit and loss, you have a good idea of your tax liability.
When your accounts are returned to you, your tax owing is far greater than you expected. Your accountant explains this is due to corrections they have made to your accounting records.
Why not learn more about what the tax office allows as deductions, and involve your accountant in year-end tax planning to minimise any surprises during tax preparation?
Read on to learn more about what you can do as a business owner to ensure your transactions have been coded properly.
There are a number of expense accounts all accountants review as part of the taxation engagement to ensure your expenses have been treated properly for tax purposes. Remember to attach a copy of your expenses within your accounting program. This will reduce the questions your accountant will have for you at year end.
These expense accounts include:
1. Personal expenditure
This is the most common mistake business owners make when bookkeeping.
They record many personal expenses – such as residential rent, entertainment, personal use purchases – as business expenses.
It is important to have a chat with your bookkeeper and accountant about the deductibility of each expense and, if in doubt, it is best to record these expenses as owner drawings.
2. Repairs and maintenance
Small businesses are currently permitted to deduct capital expenditure up to $20,000 as an immediate write-off. It is still important for small business to allocate any capital expenditure to the fixed asset accounts, and let your accountant work out what can be deducted for tax purposes.
Capital expenditure is defined as money spent by a business acquiring or maintaining fixed assets. Often business mistakenly allocate these transactions to repairs and maintenance.
3. ‘General’ or ‘Sundry’ expenses
Many business owners create a ‘dumping’ account called General or Sundry expenses, and allocate transactions here that should be coded elsewhere.
Your accountant will review this account and allocate these transactions to the correct account code.
4. Other income
We often see transactions here such as the proceeds from the sale of a fixed asset, insurance proceeds, or a BAS refund. Both of these items need to be allocated in your accounting program to specific accounts.
If you are unsure of how to allocate, please consult with your accountant or bookkeeper.
There are a few types of insurance that are not deductible by a business for tax purposes. Generally speaking life and trauma insurance are not deductible, but there are exceptions. Make sure any insurance that is not deductible is reallocated to the owner drawings account.
6. Large bank fees
It is very common to see large bank fees allocated to the bank charges account that are in fact either merchant fees (on which you can claim GST) or fees charged by your bank for borrowing and revaluation purposes. Borrowing costs are not deductible for tax all in one year. They must be set up as an asset and amortized for tax purposes over a number of years.
As you can see, it is very important to involve a bookkeeping and tax professional to check your business accounts prior to year-end. This is called a tax planning session. This way you will be able to produce accurate management reports and better understand your taxation liabilities.
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