Expenses of Business loan that you can claim during tax time
Businesses of all sizes rely on external funding for their growth in Australia. In addition to proper financing, you need to understand the importance of a payment plan and how it affects cash flow, working capital, and tax relief.
As tax time approaches, we bring you an important topic to consider. It is essential to understand the tax treatment of loans for business, deductions available, reporting and compliance requirements, and common mistakes businesses make during tax time and how to avoid them. Fiscal year end is the time to make sure you pay the taxes you owe and make the most of your eligibility for deductions. If you are a small business owner applying for a business loan, that loan can impact your tax liability. Let us see how.
Is business loan tax deductible in Australia?
Yes and no. The interest paid on each short-term business finance repayment is tax deductible, but you cannot charge tax on the loan amount you owe to the lender. You can claim all interest on your business loan until June 30th. You may charge interest on personal finances used to maintain the business (claim on personal tax returns).
All business-related interest payments are tax deductible, including interest on employee contributions, new income-generating assets (such as equipment), and financial instruments such as business loans. To prevent your tax claim from being dismissed, keep a record of all interest payments you make to your business loan lender. To deduct interest from loan payments, you must show the ATO (Australian Taxation Office) that you have paid interest.
Expenses you can claim as a deduction
You can claim most costs associated with running your business. Just check:
- They are directly related to your income generation
- Expenses must be for business, not personal use
- If your expenses are a mix of business and personal use, you can claim only the portion used for business purposes.
- You have records to support your claims.
You can claim deductions for the following types of business expenses:
- Vehicle cost – offsite location
- Work from home
- Travel expenses
- Worker salaries, wages, and over contributions;
- Repair, maintenance, and replacement costs;
- Other operating expenses
- Asset depreciation and other capital expenditures;
What else can you write down?
Besides interest payments, there are various ongoing fees that businesses can charge. It includes:
- Insurance benefits
- Employee training
- Gifts for employees
- Travel expenses
- Employee Special Donations
- Repair and maintenance
The full list of possible business deductions is complete. Precise records are essential for business owners who want to pay little tax, so they can make as many claims as possible without being denied.
Can I get a deduction if I use the loan for business to pay taxes?
You can see the additional complexity thrown into the mix here. You can deduct interest on all business financing from your taxes. These forms of financing include business loans, lines of credit, and business credit cards. It is easy to borrow to buy stock or pay for equipment.
But what if you use the loan to pay your taxes? Can you claim an interest deduction in this scenario?
The ATO’s specific instructions in this regard are as follows:
“When a taxpayer operates a business to earn or generate taxable income and, in connection with the operation of that business, borrows money to pay income tax (whether to maintain the business’ ability to maximize earnings), held in sufficient amounts to fund the business, or otherwise held, interest accrued on those loans shall be deemed normal accrual in the conduct of that business.”
That means you can claim interest on short-term business finance to pay taxes. However, this is only possible for business tax invoices. You cannot charge interest if you take out a loan to pay your taxes.
It is because using a loan to pay your bills is not directly related to your business. In particular, it cannot generate taxable income for the company. However, it is possible to use the loan to settle the business tax invoice. If you use a loan to pay your company’s taxes, you may receive assets you use to run your company. Holding onto these assets instead of selling them to pay taxes affects your company’s income. Therefore, you can deduct interest from the loan you used to pay your taxes.
What mistakes should you avoid?
You should avoid making the following mistakes.
1. Not claiming all the deductions
Your business is entitled to deductions for expenses incurred to generate income. If you have any documents, feel free to request them.
2. Do not embellish information
Only claim costs that the company can prove you have spent. The ATO’s computer system compares your claims to those of other companies like yours. The ATO may ask for clarification if your business claims raise alarm bells. The consequences of tax failure are easy to avoid. If the deduction claim is false, you must return the avoided taxes and pay the interest.
3. Think of tax planning as tax time
The inability to secure funds from business loan lenders to pay taxes is one of the most common pitfalls for new businesses.
Tips for claiming deductions in the right direction
Following are some tips for claiming deductions in the appropriate direction.
1. Quality record keeping
Tax law requires you to keep records to document and account for your business transactions, including records related to income tax, GST, employee payments, and business payments. You can keep records on paper or electronically.
2. Use accounting system
A practical method of recording all financial transactions reduces administrative time and helps analyze business activities, file tax returns, meet reporting obligations, raise funds and attract potential investors.
3. Please consult your tax advisor
Tax professionals can determine what your business needs to do to stay in shape for the tax season and maximize your deductions.
Final Verdict
Many business owners still need to claim all the deductions on their taxes. Keep in mind certain things to claim to maximise returns. Maintain up-to-date records of your loans for business, track the changes in the interest payments, and stay updated with any changes the ATO introduces. You are good to go!