A tax planning strategy for small business can maximise the returns of the business and legitimately reduce the amount of taxes the small business owner has to pay the Government.
The tax planning works on reducing the taxable income and uses beneficial tax-law provisions, including applicable breaks, tax credits, and allowable deductions.
Tax planning can save money, reduce overall tax burden, maximises cash flow thus ensures economic stability, and leverages productivity.
Here are 7 strategies for Small Business Tax Planning:
1. Deduct Assets Lower Than $20,000 Immediately
- Some small businesses have existing depreciable assets that have a written down value of less than $20,000 at the end of the Financial Year. They can deduct these assets immediately to reduce their taxes. And it does not matter if these assets are second-hand or new.
- Eligible businesses can claim an immediate deduction for the business portion of the cost of an asset in the year the asset is first used or installed ready for use.
- Instant asset write-off can be used for:
- Multiple assets, if the cost of each individual asset is less than the relevant threshold
- New and second-hand assets.
- If you are a small business, you will need to apply the simplified depreciation rules in order to claim the instant asset write-off. It cannot be used for assets that are excluded from those rules.
- The instant asset write-off eligibility criteria and threshold have changed over time. You need to check your business’s eligibility and apply the correct threshold amount depending on when the asset was purchased, first used or installed ready for use.
- For assets first used or installed ready for use between 12 March 2020 until 30 June 2021, and purchased by 31 December 2020, the instant asset write-off:
- Threshold amount for each asset is $150,000 (up from $30,000)
- Eligibility extends to businesses with an aggregated turnover of less than $500 million (up from $50 million).
- From 7.30 pm AEDT on 6 October 2020 until 30 June 2022, temporary full expensing allows a deduction for:
- The business portion of the cost of new eligible depreciating assets for businesses with an aggregated turnover under $5 billion or for corporate tax entities that satisfy the alternative test
- The business portion of the cost of eligible second-hand assets for businesses with an aggregated turnover under $50 million
- The balance of a small business pool at the end of each income year in this period for businesses with an aggregated turnover under $10 million.
2. Defer Income
Small businesses can defer receiving cash or debtor payments and further invoices to push their tax payable to the next income year.
3. Bring Forward Expenses
Small businesses can buy consumable items like computer supplies, printing offices, stationery, consumables and marketing materials this income year. Purchasing them this income year gives the business the deduction this year.
4. Tools of Trade / Fringe Benefits Tax (FBT) Exempt Items
Small businesses can purchase FBT exempt items to get a tax benefit. They can package several items with a tax benefit, such as mobile phones, protective clothing, briefcases, digital cameras, personal electronic organisers, notebook computers, computer software and handheld or portable tools of the trade.
5. Private Company (“DIV 7”) Loans
Small business owners trading under a Company sometimes borrow money from their business. If they borrow money from their business in previous income years, then they need to repay the principal and interest this income year.
They must either pay back the current income year loan in full or enter into a loan agreement before the due date. If they fail to do so, the money is treated as an unfranked dividend under Division 7.
6. Investment Property Depreciation
Small business owners, like individuals, who own rental properties, can utilise the benefits of a Property Depreciation Report. They can use the report to claim building write-off deductions and the maximum amount of depreciation on their rental properties.
7. Repairs and Maintenance
Small business owners can make the payments for repairs and maintenance (employment, rental property, business) before the end of this income year to get the Tax deductions this income year. This is not to be confused with Capital Improvements which generally need to be depreciated (Subject to assets write off rules above)
Related Post: What taxes do you need to pay as a small business?
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