Small Business: 5 tips to get the most out of tax time
With the end of the financial year around the corner, here are five quick tips for small business owners to help get the best bang for your buck with the tax man and to keep your business on track for success into 2018.
Instant Asset Write-Off
We’ve all heard the constant TV and Radio ads spruiking the government's $20,000 tax break for small businesses, but this can be both a great cash flow tool and a big trap for small businesses. Essentially, this is a way to accelerate your tax deduction on an asset purchased for use in a small business.
Small business can often run into cash flow problems if they splurge on an asset they don’t necessarily need, or may not need for many years – just to get a tax deduction. Remember a tax deduction for a small business company is only 27.5 cents in the dollar that you spent.
This can be a big cash flow winner for small businesses – but only when used correctly! That is, purchasing a business asset for less than $20,000 that there is an immediate need for in the current business operations. If something comes to mind, and cash flow allows, buy the asset prior to 30 June to lock in the tax deduction for the 2017 financial year.
Deferring income and prepayments
If you expect lower income in the 2018 financial year than the current year, consider deferring income until 1 July when you will be in a lower tax bracket.
The simplest way to defer income for small businesses is to delay issuing invoices until July so that this income is assessed in the next financial year.
Conversely, if you think your business income will be higher in the current tax year than next year, there will be a tax benefit in pre-paying certain deductible expenses to offset your higher income and bring forward the timing of the tax deduction. Some simple examples of prepayments we regularly see are:
- Interest on investment loans
- Insurance premiums
- Financial or other advisor fees
Another easy tax deduction for small businesses with employees is to pay the superannuation for employees for the last quarter of the financial year prior to 30 June. You will be making this payment within the next month anyway so it makes sense to get the tax deduction now, rather than wait another 12 months.
As a small business owner, every day of your life you have to work hard to build and protect your assets. We all get busier and hundreds of issues that we have to deal with pop up every day.
Usually, this means some crucial aspects of our businesses are overlooked and we often find that insurance policies fall into this category as it is easier to keep them rolling over as they always have been, then to shop around for a better more cost-effective policy that gives you the cover you actually need.
EOFY represents a great opportunity to review and update your insurance policies. Not only are you in the process of preparing a budget for the upcoming fiscal year and every dollar you can save is like gold, but you need to make sure that you have protected yourself and your business adequately and you have the correct insurances in place for your employees.
The usual insurance suspects for most small businesses are Public Liability, Professional Indemnity, Workers Compensation, and income protection insurance for the business owner. If you don’t have them at all or haven’t reviewed your policy for a while – now is the time to seek some advice and act.
Do you think about booking a holiday? Plan to buy a new car or invest in a new property? But at the same time are afraid to spend the money because eventually, you know you will be hit with a large tax bill?
Now is the time to plan for the upcoming 12 months, particularly to identify your tax obligations to help you meet your goals and manage your cash flow. Knowing when and how much your income tax payments will be is imperative to a small business owner.
It will help to give you surety over what cash is yours to keep at the end of the day so you can enjoy your holiday and have some (relatively) stress-free downtime.
As the beginning of the new financial year looms now is also the time to look at strategies to maximise your tax deductions, while not spending your hard earned unnecessarily.
As all small businesses and associated owners have different circumstances and goals there is no one-size-fits-all strategy.
Therefore, we as accountants, know that we need to invest our time heavily in May and June to come up with tailored advice for all of our clients.
In my experience, it really can be the subtle strategies arising out of a tax planning session towards the end of the financial year, that lead to some large tax savings.
Debtors and Bad debts
Just a quick (but very important) one to finish. Coming up to EOFY make sure you follow up and urgently review customers that owe you money!
If that doesn’t work get a collection agent or engage a lawyer to draft a letter of demand prior to EOFY to try and get that money in the door ASAP.
Make sure you consistently review the debtors and determine what debts will never be recovered so you can include them as bad debts and potentially write them off as a tax deduction on your tax return.