- Income and expenses
You will have expenses when producing your business income. You can deduct some of these from your sales/income to arrive at a net profit or loss. You'll pay income tax on your net profit.
What is your business income?
Your business income is:
- what you receive from the sale of goods and services
- any 'cash' jobs you do, and
- the value of any transactions you barter.
What are business expenses?
Business expenses are:
- day to day expenses for the running of your business, like advertising or wages (we call these revenue expenses), and
- assets you purchase, like plant or machinery (we call these capital expenses).
Generally, you will claim your revenue expenses in the year you incur them, while you will depreciate capital expenses over time.
If you're registered for GST, your income tax return will exclude GST on your income and expenses (GST is accounted for in your GST return).
If you're not registered for GST, your income tax return will include GST on your expenses only.
To claim an expense, you must have a record of that expense, e.g. a receipt, or we may not allow the expense to be claimed.
Note: Claiming personal expenses as business expenses is committing fraud and could result in a shortfall penalty being imposed, or possible prosecution action. It is important that you can show how your expenses link to your business.
Check out these useful resources to help answer your income and expense questions:
- "Introduction to business" videos on income and provisional tax, and expenses.
- Entertainment and travel expenses
Some business entertainment expenses are fully deductible while others are only 50% deductible.
You need to keep receipts and a record of the reason for the entertainment.
Travel and accommodation expenses
If you spend time travelling as part of your business, you can claim this cost as an expense.
- A good way to prove the business portion of your travel expenses is by keeping a diary of your travel.
- You need to keep receipts and a record of the reason for the travel.
Our interactive demo provides information on both entertainment and travel expenses.
- Home office expenses
If you use an area of your home for your business you can claim a portion of the household expenses such as:
- house and contents insurance
- mortgage interest (if you own the home), or
- rent (if you are renting the home).
You must keep invoices for these expenses.
A new method will be available for the 2017-18 and later income years to calculate the expenses you can claim for using your home as an office. This method will use rates that Inland Revenue will calculate and publish. If this option is used no further deductions will be allowed in relation to the use of your home.
If you aren't using a separate area for your business you'll need to take into account the amount of time spent on your business activities and the area used. The business percentage of your home office expenses can be claimed as a deduction for income tax.
If you're GST registered, the GST content on home office expenses can be claimed as they are paid (in each GST return period), or at the end of your tax year. Remember that mortgage interest and rent doesn't include GST.
You'll also find a video on expenses that covers home office expenses on our "Introduction to business" videos page.
- Vehicle expenses
Many people use their car for business and private use.
Different rules apply to the amount of travel you can claim for your vehicle, depending on whether you operate your business as a sole trader, partnership or a company.
Check out the "Introduction to business" video on expenses that covers how to claim motor vehicle expenses in a business.
How to claim vehicle expenses is detailed below.
Sole trader or partnership
If you're a sole trader or in a partnership and you use your own vehicle in the business, you can claim a portion of the expenses you incur for running costs such as:
- car insurance, and
If you use the vehicle strictly for business, you can deduct the full running costs without making any adjustments.
If you use the vehicle to travel from home to work, or any personal travel, you'll need to separate the running costs of your vehicle between business and private use. Travel between home and work is not classed as business use.
There are three ways you can claim expenses:
- Use a log book to identify how much you use your vehicle
To claim expenses for a vehicle used privately and for business you'll need to keep a log book for three months. You can use our free log book template to record your travel and use.
After three months, work out the number of kilometres you travelled for your business and compare this figure to the total kilometres travelled. This is the percentage of your motor vehicle expenses you can claim against your income.
You can generally use this percentage for three years before needing to keep a log book again for a further three month period.
- Claim up to 25% of all vehicle expenses
If you don't keep a vehicle logbook, you may claim up to 25% of the vehicle running costs as a business expense. The amount a person can claim is the lesser of the proportion of business use and 25% of the total use of the vehicle.
Please remember you could be asked to substantiate the percentage claimed so you'll still need to keep records of your vehicle expenses.
- Claim kilometre rates
Prior to the 2017/18 income year kilometre rates were limited to 5,000 kilometres or less of business travel.
For the 2017-18 and later income years, kilometre rates are changing. Inland Revenue has published new two-tier kilometre rates that can be used to work out your deduction for motor vehicle expenses. Kilometre rates will not be limited to 5,000 kilometres.
You'll still need to keep a record of the total kilometres you travel in order to calculate the percentage difference between business and non-business travel, and then calculate your deduction based on the two-tier kilometre rates.
If you trade as a company, vehicle expenses are calculated differently.
When a company owns a car, a logbook isn't required and it can claim all the expenses without making a private use adjustment.
However, the company will be liable for fringe benefit tax (FBT) if the vehicle is available for employees or shareholder-employees private use, including driving it to and from work. The company will also have to calculate GST on the fringe benefit. Some vehicles may meet the exemption criteria. For the 2017-18 and later income years some close companies may now be able to use the rules for motor vehicle expenses for sole traders or partnerships instead of the FBT rules.
If the shareholder uses their own vehicle, the company can reimburse the shareholder but if kilometres are over 5000km they need to consider whether the kilometre rate is still a reasonable calculation of expenditure.
Our Fringe benefit tax on motor vehicles calculator will assist you with calculating the FBT on company motor vehicles.
If you’re a close company with shareholder-employees
The kilometre rate is available to close companies where the only fringe benefit provided is the provision of one or two motor vehicles to shareholder-employees for their private use.
Close companies can elect to use the motor vehicle expenditure rules instead of paying FBT on the value of the benefit when they make a motor vehicle available to a shareholder-employee for their private use and elect to apply the kilometre rate method.
In some circumstances a GST adjustment may be required to reflect any difference between the actual proportions of business and private use of the motor vehicle and the intended proportions of business and private use of the motor vehicle.
Once a company has chosen to use the kilometre rates method you will need to continue to use it until you cease to use the vehicle for business use or you dispose of the motor vehicle.
You can find information in our Tax Information Bulletin Vol 29, No 4 May 2017, pages 70 to 72.
- Non-deductible expenses
Not all business expenses are expenses for income tax purposes.
Some examples of non-deductible expenses are:
- set up costs of your business (including the Companies Office registration fees)
- cost of plant and machinery (these may be depreciated)
- repayments of principal on loans
- capital improvements to equipment (which differ from deductible repairs and maintenance)
- private expenses, such as life insurance, interest on money borrowed for private purposes
- drawings from the business
- legal fees exceeding $10,000 when purchasing capital assets for your business.
Note: If you're GST registered you can claim GST on the set up costs.