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Introduction to Business
Business expenses & depreciation
Kia Ora, welcome to an Introduction to Business.
This is part two of our series.
We will talk about
- Business expenses
In this section we’re going to look at, Business expenses and depreciation.
- Revenue expenses
Day to day business expenses
- Capital expenses
Asset related expenses
- Non-deductible expenses
Expenses you can't claim
Business expenses are broken down into 3 different types.
These help the business run day to day.
For example, office supplies, rent or lease payments.
These are generally related to assets purchased for the business, and last longer than the financial year.
For example a courier drivers van.
There are also some expenses that are non-deductible, such as parking tickets.
Sole Trader or Partnership
Three ways to work out expenses.
- Use a logbook
Minimum 3 months (90 consecutive days)
Every 3 years, or more often if the percent changes by 20 percent
- Claim kilometre rates
- Claim up to 25 percent of vehicle expenses
For most new businesses one of the biggest expenses are vehicle related.
We're going to look at 2 different scenarios, depending on the business structure.
Both at the end of the day take into account private and business use, it’s just the process which is different.
Firstly, we are going to look at a sole trader or partnership, then move onto a company.
For a sole trader or partnership there are two ways of calculating vehicle expenses.
To determine a business to private use percentage, you can use a logbook for a 90 consecutive day period.
You are then able to use the percentage outcome for a 3-year period, unless your usage changes by plus or minus 20 percent, then a new logbook will be required.
Most new business will find their vehicle usage changes as their business grows.
Alternatively, you can keep a track of actual kilometres travelled for business, and use a set rate which is published by Inland Revenue.
You will need to know you start and end of year odometer reading as well, to work out your private and business use.
If you do not keep the records needed to substantiate your vehicle expenses claim, then this claim can be limited to 25 percent, or less, if that is more reasonable or evidenced.
This is known as the default rate.
It is not a third option.
If you do not keep a logbook or record of your kilometres, then you run the risk of having your vehicle expenses limited.
Which, for many businesses, will not a be true reflection of the actual costs incurred to the business, and may mean you end up paying more in tax in the long run.
If you opt for the logbook option, you'll need to keep all receipts to do with the vehicle.
For example, all fuel receipts, insurance, repairs, and maintenance, as you’ll tally-up all of these at the year end and claim the percentage as per the logbook.
This will create your vehicle expense figure, in your end of year return.
A logbook Excel template can also be found on our website.
Search logbook and select use a logbook.
The logbook download is found at the bottom of the page.
Let's now look at how we would apply the kilometre rate.
Vehicle expenses – example
The vehicle logbook for the 2019-2020 year shows 60 percent business use and there was a total of 20,000 kilometres travelled.
|Distance multiplied by Rate multiplied by Business use equals expense|
|14,000 multiplied by 79 cents, multiplied by 60 percent, equals 6,636|
|6,000 multiplied by 30 cents, multiplied by 60 percent, equals 1,080|
|Total deduction equals 7,716.00 dollars|
In this example, the vehicle has travelled 20,000 kilometres for the year and was used 60 percent for business.
As per the current rates set by IR, the first 14,000 kilometres is set at 79 cents per kilometre, and the remaining 6,000 kilometres is set a 30 cents per kilometre.
We take 60 percent of these values as this is the business portion.
Using this example, your vehicle expense in your end of year calculations would be 7,716 dollars.
I’ll give you a few moments to look at the calculation.
Company owned business vehicle
Worked out differently.
- Claim all expenses without making private use adjustment
- Logbook not required
- Liable for fringe benefit tax (FBT) if the vehicle is available for private use
As mentioned earlier the, vehicle expense calculation for a company is different due to its structure.
A company would claim the expenses in full that relate to a company owned vehicle, therefore, no logbook is required.
Any availability for private use will be accounted for, under the fringe benefit tax regime.
Home office – option one
Actual costs (floor area calculation)
An example showing an area of 6 square metres is being used as home office space in a 100 square metre house.
Claim 6 percent of:
- House insurance
- Mortgage interest
- Contents insurance
Some small businesses run from home.
We therefore need to take into account that some of the expenses associated with the home, are incurred in the running of the business.
This is often referred to as the home office expense.
There are 2 ways of calculating home office expenses, actual cost, and the square meter rate.
Let’s look at the actual cost option.
You’ll need to determine the total area of your home.
You may already know this, or you may need to do a measurement of the exterior.
We then need to determine the area that is used for business.
This may be part of the garage if it’s used for storage, and maybe your guest room it its set up solely as an office.
If your space is used for business and part for another activity, we are only taking into account the area used for business.
In this example, the total area of the home is a hundred square metres, and the area used for the office is 6 square metres.
This equates to 6 percent of the home being used for business.
You need to keep all receipts and invoices associated with the home.
For example, rent, power, house and contents insurance.
If you own the home, you will need to know the interest paid on your mortgage.
Six percent of all these things will be your home office expenses in your end of year return.
Remember to keep all of your workings, just in case.
And if you move, you’ll need to redo these calculations.
Let’s look at option 2.
Home office – option two
Square metre rate
Add together your:
- Premises cost
(mortgage interest/rent plus rates) multiplied by office percent
- Utilities cost
Standard rate per square metre multiplied by office area
|Premises cost||26,000 multiplied by 6 percent equals 1,560|
|Utilities cost||42.75 multiplied by 6 (for the metres squared) equals 256.50|
|Total cost||1,816.50 dollars|
Option 2 is known as the square meter rate.
We still need to determine your premises costs, as these depend on your own situation.
IR have determined a utility cost set rate that you can apply instead of keeping all of your receipts and invoices.
The premises cost is determined by adding together your mortgage interest, or rent cost, plus rates.
We then multiply this figure by the percentage area of the home office.
We then need to determine the utilities cost, which is the square meterage of the home, multiplied by the set utility cost of 42 dollars 75.
We then add these 2 figures together to determine the home office expense using the square meterage rate.
I’ll give you a few moments to look at the calculation.
Let’s move on to other typical business expenses.
Typical business expenses
- Telephone and internet
- Travel and accommodation
- ACC levies
- Salary and wages
- Special clothing
Our tax system in New Zealand is based on self-assessment and honesty.
These are some common examples.
If you have a home line you can claim 50 percent of telephone rental, plus any business toll or mobile calls.
You’ll need to keep your bill and identify the business-related calls if your home is the centre of operations.
Mobile phones are more common these days.
If your mobile is prepay, you’ll need to determine a reasonable percentage.
You may wish to jot down some of this reasoning when you’re determining this.
Keep this with your records, just in case we ever ask how you came up with this.
If you’re on a plan, then the business calls are fully deductible.
It is common for your home line and internet broadband, or mobile to be part of a package deal, you’ll need to determine a reasonable percentage that is used for business.
Entertainment expenses are limited to either a 50 percent or 100 percent claim.
This depends on what type of entertainment, and where the entertainment is happening.
I suggest reading the, Entertainment guide, IR268, before you start wining and dining.
If you need to go away for work, then travel and accommodation expenses are fully deductible.
If you decide to stay on for some personal time, then the cost associated to these days are personal, and cannot be claimed as a business expense.
Note, that this includes a reduced claim for any airfares as well.
A website is a capital asset, and the costs must be capitalised and depreciated if the cost exceeds the threshold.
Ongoing costs of updating or adding to the information on a website are a revenue expense.
All business will be charged an ACC levy that cover any workplace accidents.
These levies are risk based, so vary from industry to industry.
They are a deductible business expense in the year which they are paid.
Any insurance is fully deductible if specifically related to business, for example public liability insurance.
Any interest on money borrowed for a business is an expense.
So are the gross wages paid to any employees.
Any clothing which has the business logo, or is protective in nature, like, safety gear, hard hats, wet weather gear, is considered a business expense as well.
- Asset register
- Depreciation rates
- Straight line method
- Diminishing value method
- Pooling assets
Depreciation is a method of deducting the cost of an asset over its useful life.
There have been some changes to depreciation due to COVID-19.
One most significant for business was the increase in the, low value asset threshold, until 16 March 2020.
If an asset was under 500 dollars, then it was claimed in full in the year of purchase, it was not depreciated, even though it may meet the definition of an asset.
For the period 17 March 2020 to 16 March 2021 this limit has increased to 5,000 dollars.
From 17 March 2021 onwards, this limit is reducing to 1,000 dollars.
Depreciation can seem complex at first.
There are some really useful tools on our website, like the depreciation rate finder and calculator which are designed to do all the hard work.
You simply answer the questions and it will produce a schedule of amounts to be claimed in each year.
You will need to keep an asset register.
This is also very useful for insurance purposes.
It’s simply a list of assets the business owns, when they were purchased, and how much they were purchased for.
Depreciation rates are set by Inland Revenue.
They vary depending on the useful life of an item.
For example a car, it’s expected to last longer, than an angle grinder.
There are 2 different ways of calculating depreciation.
Straight line is when you claim the same amount each year, until it has an nil book value.
Diminishing value is when you claim the same percentage of the book value each year, as the book value of the assets goes down, so does the depreciation claim each year.
It’s possible for an asset to have a book value of nil, but still be used in the business.
Pooling refers to grouping a number of assets together to do one depreciation calculation, instead of a calculation for each asset.
Each asset must have a value of 5,000 dollars or less, and you must use the diminishing value method.
Also, if the assets you pool, or group together, have different depreciation rates, you must use the lowest rate for all of the assets in the pool.
As I said earlier, depreciation can seem complex.
So you may wish to pause this seminar and go and have a play around with our calculators.
Simply search depreciation on our website.
Tax relief - COVID-19 Coronavirus
- If you’ve been affected by the downturn in business due to COVID-19 coronavirus, we have a range of ways to help.
- Talk to your tax agent, visit ird.govt.nz/covid19, or phone 0800 473 566 for more information.
Go to ird.govt.nz/covid19 for more information
The government has introduced a number of ways to support businesses that have been impacted by COVID-19.
This includes options with respect to tax relief.
For the latest updates please go to our website and view the Covid-19 page.
You can also contact your tax agent or ring our contact centre to discuss your specific situation.
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