The video title Business Basics Expenses of a sole trader and record keeping slides in from the left.
The title slides to the right of the screen and is replaced by a person sitting at a desk with a laptop. File folders, a desk lamp and a mug also appear on the table. A clock ticks on the wall. 3 lights hang from the roof and there is a potted plant on both sides of the desk.
The words REVENUE EXPENSES and CAPITAL EXPENSES appear above the person’s head. REVENUE EXPENSES changes to BUSINESS EXPENSES. CAPITAL EXPENSES changes to PRIVATE EXPENSES.
Easy listening style music plays throughout the entire video.
Not all expenses are treated the same way.
In this video, we’ll explain the difference between revenue and capital expenses as well as the difference between business and private expenses, and what you can claim in your income tax return.
A blank INCOME TAX RETURN is displayed. A calculation appears on the blank income tax return, GROSS SALES minus BUSINESS EXPENSES equals NET PROFIT.
Taxable income is represented by NET PROFIT plus ADDITIONAL INCOME. NET PROFIT and ADDITIONAL INCOME are then replaced by the words TAXABLE INCOME.
You need to understand how expenses work because they're an important part of your tax calculation.
When you complete your return, you record your gross sales for the year and deduct your business expenses.
This will give you your net profit.
You pay income tax on your taxable income, which will be your net profit plus any additional income.
The INCOME TAX RETURN shrinks, the words REVENUE EXPENSES drops down from the top right of the screen.
Icons representing stationery, rent, power and ACC levies appear under REVENUE EXPENSES as these are some of the types of revenue expenses your business may have.
A dollar sign is displayed showing the amount you can claim for revenue expenses depends on the percentage they relate to your business use.
Revenue expenses are incurred in the day-to-day running of the business.
They’re expenses like stationery, rent, power and your ACC levies.
Revenue expenses can be deducted from your gross income, provided the expense relates to your business.
The revenue expense icons disappear and REVENUE EXPENSES is replaced by CAPITAL EXPENSES.
Icons representing motor vehicles and machinery appear under CAPITAL EXPENSES as these are some of the types of capital expenses your business may have.
A cross is displayed as you cannot claim a full deduction for the cost of a capital expense, instead you claim depreciation. A dollar sign with an arrow next to it pointing down is displayed representing depreciation claims.
Capital expenses are different.
They’re big-ticket items that you keep in your business for longer than a year.
Common examples include motor vehicles and machinery.
You can't claim a deduction for a capital expense, instead you claim depreciation.
The words PRIVATE EXPENSES drops down from the top left of the screen, and BUSINESS EXPENSES from the top right of the screen. BUSINESS EXPENSES is faded. A cross is displayed as you cannot claim a deduction for private expenses.
BUSINESS EXPENSES if fully displayed as some expenses are both private and business related. PRIVATE EXPENSES fades as you can only claim an amount for the business percentage use of private expenses.
Moving on to private versus business expenses.
Private expenses are not deductible.
So, if the expense is partly business and partly private, you need to make an adjustment to ensure you're only claiming the business percentage.
Alan’s house is shown with his car parked outside it.
Part of Alan’s house is highlighted and a percent sign is shown on it representing a percentage of his household expenses he can claim as business expenses.
Icons representing rates, insurance, power, rent and mortgage interest appear under the house as these are some of the household expenses that can be claimed when you have a business that you run from your home.
A house floor plan appears on screen, one of the rooms is highlighted and 10% is displayed in the room. This is how much of Alan’s house is used for his business so is the percentage of household expenses he can claim for his business.
The square metre symbol m2 is displayed as the square metre rate is another method to work out the amount of household expenses you can claim for your business.
So, let's have a look at Alan's office, car and other expenses.
Alan has an office based in his home.
As he has set aside this office exclusively for business use, he is able to claim a percentage of his household expenses in his tax return.
Common examples of household expenses are rates, insurance, power, rent and interest on your mortgage.
The percentage you can claim is based on floor area.
Alan's office is 10% of the total floor area of his home.
So, he can claim 10% of the household expenses he uses for business.
Alternatively, if unsure of the percentage, Alan could have used our square metre rates to work out the amount of household expenses he can claim.
Alan’s car is divided in half showing that it is used for both private and business purposes. A percent sign is displayed on each half of the car, these disappear and are replaced by the kilometre symbol KM on the business use side. These show that Alan clan claim expenses for using his car by percentage of business use or by using the kilometre rates.
A logbook is displayed, the heading changes from MONTH 1 to MONTH 2 and then MONTH 3. New travel entries are added to the logbook showing Alan keeps track of his business use of the car. The entries are replaced by a pie graph showing private use compared to business use percentage.
An income tax return is displayed and the business use portion of the pie graph moves over to the income tax return representing the percentage of vehicle expenses he can claim. 3 YRS (3 YEARS) is displayed on the income tax return. This is how long you can use the worked out percentage of business use for before needing to work it out again with another logbook.
A laptop is displayed which shows KILOMETRE RATE and an icon representing a data table on the screen. The logbook is highlighted and an icon representing an odometer is displayed as business trips and lengths need to be recorded each year. The expense claimed are worked out based on business use percentage, total kilometres travelled and the kilometre rates.
Alan’s office overlooks his driveway which has his car in it.
Alan’s car is for both business and private use.
To claim the business expenses relating to his car, Alan can work out the percentage of business use or keep a record of total kilometres travelled for business.
To work out the percentage of his car use that is for business, Alan can keep a logbook and record each business trip he makes in his logbook for three months.
After three months, Alan can work out the number of kilometres he’s travelled on business as a percentage of total kilometres travelled.
This is the percentage of his motor vehicle expenses that he could claim in his tax return.
Alan can use this percentage for three years.
After three years, Alan would need to keep a logbook again for another three-month period.
Or, Alan could claim the Inland Revenue kilometre rate.
As well as his logbook, he would need to record his odometer reading on the thirty-first of March each year.
He would then calculate his claim based on the logbook percentage, the total kilometres travelled and the kilometre rates.
Alan is shown sitting at a desk in front of a computer in his home office. Icons representing telephone and entertainment expenses are shown as are some other business expenses that can be claimed.
A cashbook is displayed showing income and expense entries as this is how Alan keeps track of it all. The cashbook is replaced by icons for INVOICES and EXPENSE RECEIPTS as Alan keeps all of these too for auditing purposes.
An icon representing a cloud backup from accounting software can keep your records safe when keeping electronic records.
Alan makes other private use adjustments for other expenses too, like his telephone expenses and entertainment.
As required, he keeps a record of his expenses as he goes.
Alan uses a cashbook to keep track of his expenses and his income.
Alan keeps all of his invoices and receipts, because if he’s audited and doesn’t have his paperwork, his claim may be disallowed.
Alan keeps his records electronically and he makes sure to keep a backup copy, accounting software can help here.
Three laptops appear with a different website address shown on each one for more information. From right to left, the website addresses are acc.co.nz, business.govt.nz, ird.govt.nz
The video ends with the Inland Revenue Te Tari Taake logo.
Wrapping up, to find out about your ACC levies, check out ACC's website.
For useful tools and resources for business, visit business.govt.nz
Visit our website, ird.govt.nz to find out more information about expenses.