What Can I Claim On Tax As A Sole Trader?

It is so tough to grasp what a single proprietor has to do to understand the tax consequences of running their business since the ATO website and the websites with a bunch of adverts competing for attention make it so.

Because you are a lone proprietor, your firm will inevitably have operating expenses. The good news is that many of these operating costs may be claimed as business expenditures, which means that you’ll pay less tax and get to keep more of the money that you’ve worked so hard to earn.

Given the wide variety of things that qualify as expenses, it is simple to forget or lose track of which ones may be claimed and which ones cannot. However, this might ultimately result in you paying a higher tax bill than is necessary for your situation.

Legislators have added various new provisions to the tax law over the course of many years in order to ease the financial burden of the additional expenses that self-employed people are expected to bear when operating their businesses. However, the Tax Cuts and Jobs Act of 2017 (TCJA) did away with many tax deductions for self-employed people. A good many of these alterations are only going to be in effect until 2025, but some of them are going to be permanent.

The law has a variety of effects on small companies, the most significant of which is a convoluted deduction of twenty percent of company revenue for pass-through organisations. These are businesses that pay taxes via the individuals who own them rather than through the corporation itself.

How Do I Know I Am A Sole Proprietor?

Great question. In order to ascertain whether or not you are a single proprietor, it is vital to assess your business structure. It is essential that you have this information in order to compute your deductions!

There are no constraints placed on the types of businesses that can be operated as sole proprietorships. A single owner is an individual who owns and manages their own firm in its most fundamental form. Due to the fact that it is not recognised as a separate legal organisation, the owner is personally responsible for meeting all financial and legal responsibilities.

Even if you do work as an independent contractor for one or two different companies, it is quite probable that you are operating your business on your own. In most cases, an independent contractor’s pay will not have any taxes deducted from it by the company that pays them. So if no one is deducting taxes from your pay, it’s probable that you’re operating as a sole proprietor.

One of its many attractive features is the ease with which a single proprietorship may be established. Because you literally only need yourself and an expertise to get started, it is the firm that is the least difficult to launch. To offer you some ideas below is an example of a business that is owned and operated by a sole proprietor:

• Services relating to the maintenance of computers
• Writing or graphic design on a contract basis
• a business that specialises in landscaping or grass maintenance.
• Photography

How Does A Sole Proprietorship Pay Taxes?

It is imperative that you start thinking about taxes as soon as possible now that you are aware that you are a sole owner. We are aware that this is not the most enjoyable subject matter.

We are going to explain everything in detail in an effort to make the process simpler for you.

Visiting the website of the ATO and making an electronic payment is the simplest and most convenient way to pay your taxes as a lone entrepreneur. You can use your checking or savings account, a debit card, or a credit card. In addition, you are able to plan ahead for payments to be made by utilising your bank account. Calling in a payment is an additional option available to customers who are paying with a debit or credit card.

You have the option of sending a check, however, the easiest method is to pay online.

If you’re unable to satisfy your tax due, you can set up a payment plan. However, please be aware that this may involve interest and other costs for being late.

Make sure you have a look at the website of the Department of Revenue in your state. They are in charge of handling state taxes for sole proprietorships, thus, that is the location where you will need to send your payment to the state. Even if you owe less in state taxes than you do in federal taxes, it is imperative that you take care of them.

Allowable Deductions For Sole Traders

Suppose your costs are directly related to the operation of your business and the generation of taxable revenue. In that case, you may be eligible to deduct those expenses from your individual tax return.

The Australian Taxation Office states that in most cases, you are eligible to claim a deduction for the following business costs in the same year that you incurred them:

• Advertising
• Bad debts
• Home office overhead costs.
• Bank charges
• Expenses related to using motor vehicles for business
• Travel required for work
• Memberships in professional organisations and educational opportunities
• Insurance\sInterest
• Bills for phone service
• Maintenance and mending of things
• Expenses incurred in preparing taxes

Depreciation on capital expenses, which are costs that are incurred over a longer period, is often claimed over many years. Examples include: 

• Computers
• Electrical instruments
• Furniture
• Automobiles and trucks
• Plants and equipment.

Only the percentage of a cost necessary for your firm’s operation can be deducted from your earnings.

When filing taxes as a single proprietor, you are not allowed to deduct personal or family expenditures, costs of amusement or penalties, or charges related to non-taxable income, such as money made through a side business or hobby.

What Are Tax Deductions?

A tax deduction is a cost that is removed from the amount of income that is subject to taxation. Therefore, taking advantage of tax deductions lowers the amount of income subject to taxation.

Consider the following scenario: throughout the course of the fiscal year, you had a total of $10,000 worth of business-related costs and produced a total of $75,000 in income. In this scenario, the amount of your taxable income would be reduced from $75,000 to $65,000, resulting in a lower total tax liability for the given year.

When you run a business in Australia, you may deduct the vast majority of the costs associated with doing so from your taxable income.

The Australian Taxation Office (ATO) states that in order for a business cost to be eligible for a tax deduction, it must satisfy all three of the following criteria:

• The payment must have a clear connection to the operation of your firm and cannot be used for your own benefit.
• You are only allowed to deduct the percentage of the cost associated with your business if the expense was used for your business and your personal life.
• You are required to have records to demonstrate this. Note that having a “record” does not always mean you need a receipt for every transaction.

Everyone who is self-employed, including independent contractors and sole proprietors, has the ability to deduct business expenditures from their income.

What Expenses Can A Sole Trader Claim?

• You are eligible to claim a tax deduction for any expenditure you make that is subsequently put to use in the production of income for your company.
• Suppose your primary residence also serves as the location of your business. In that case, you may be eligible to deduct certain business-related expenses, such as rent or mortgage interest, property taxes, utility bills (including water and electricity), and insurance premiums; however, the amount you deduct will be proportionately reduced based on the proportion of the property that is used for commercial activities.
• The proportion of your operating expenses that are attributable to your company’s use of the telephone and the internet
• Expenses related to your vehicle – In a similar vein, you may be eligible to claim a percentage of the expenses related to your vehicle for travelling to and from the locations of clients, attending training sessions, travelling to pick up supplies, or travelling to the post office, to name a few examples.

The costs you incur to own, rent, or utilise your house are referred to as occupancy expenditures. They are as follows:

• mortgage interest or rent
• council rates
• land taxes
• house and contents insurance premiums.

If you run a company out of your home, you might be able to deduct some of the costs associated with running the business from your overall occupancy expenditures. However, you need to demonstrate that you are entitled to deduct interest charges before you can submit a claim for a deduction related to occupancy costs.

If you are qualified to deduct occupation costs, you will also be qualified to deduct operating costs if you own the property. However, if your company falls under the purview of the personal services income regulations (PSI), it is possible that you may be unable to deduct occupancy costs.

Home Office Expenses

You may be eligible to claim tax deductions for home-based company costs if you perform some or all of your employment duties from the comfort of your own residence. These are the following:

• Running expenditures
• This includes the machinery, devices, and other tangible commodities that are essential to the operation of your company.
• Equipment for use in a home office, such as computers, printers, phones, and even furniture specifically designed for use in a home office.
• Utilities such as phone, internet, electricity, and gas are included in this category.
• The expenses of cleaning.
• Expenses associated with repairs, especially those associated with repairing home office furniture or fixtures.
• Generally, expenses associated with running a home office, such as those for stationery, printer paper, and ink.

Using the fixed-rate calculation

The Australian Taxation Office (ATO) permits sole entrepreneurs to deduct a set rate of 52 cents for each hour that they work from home. This is done to make the process of determining the cost of running costs easier.

For instance, if you work from home for 38 hours during a week, the amount of your permitted deduction for that week’s operating expenditures would be: 38 multiplied by.052, which is $19.76

This assessment takes into account the costs of heating, cooling, lighting, cleaning, and the depreciation of the furniture over time.

Choose to go with this approach. You will still be responsible for determining all of the additional costs associated with operating a home office on your own, such as the following:

• Expenses for using the telephone and internet in connection with work
• Stationery
• The decrease in value of equipment, such as computers and other devices

You also have the option of manually calculating and deducting all of the operating expenditures. Still, you’ll need to maintain records—such as a diary of the number of hours you work from home for the year—to prove your claim is reasonable.

Occupancy costs

This accounts for the intangible fees and expenses incurred when operating a business from the comfort of one’s own home.

• Rent Mortgage interest
• Insurance for one’s property
• Taxes on land and council rates

Calculating occupancy expenses

Suppose you are able to claim expenditures related to occupation because you work from home. In that case, you will need to determine what percentage of your house is dedicated to work-related activities. You are able to accomplish this by computing:

Multiply the total expenditures by the proportion of your home’s floor space that you use for work, and then multiply that number by the number of months out of the year that space was utilised only for business.

For instance, if the floor space you use for work takes up twenty percent of your house and you worked from home for the whole year, you are eligible to deduct twenty percent of the total amount you spent on occupation expenditures from your taxable income.

Expenses incurred for the vehicle and travel

If you use a car or other vehicle for work-related reasons, you may be allowed to deduct the following expenditures associated to that vehicle:

• Fuel and oil
• Maintenance and fix-up work
• The interest accrued on a loan for a motor vehicle
• Lease payments
• Insurance cover premiums
• Registration expenses
• A fall in value (loss in worth) (decline in value)

Remember that the only car costs you may deduct are those directly related to your business. For instance, if you use your automobile for work fifty percent of the time, you are eligible to deduct fifty percent of the costs listed above under the category of “business expenses.”

The Australian Taxation Office recommends keeping a diary or logbook to keep track of the percentage of time spent driving for business versus pleasure.

Calculating your car deductions for the year can also be done with the “cents per kilometre approach,” which is a simplified version of the traditional method. For example, you are able to make a claim for 68 cents per kilometre for each and every kilometre that you travel during the course of the year, up to a maximum of 5,000 kilometres.

In addition, if you travel for business purposes, you may be eligible to get reimbursement for certain expenditures, including the following:

• Airfares
• Public transport or taxi rates
• Car rental fees in addition to other expenses such as gas, tolls, and parking fees
• Expenses related to lodging
• Expenses incurred for meals when you are out for the night

The advice that the ATO provides for small business travel expenditures goes into further information on what types of expenses may and cannot be claimed and how to keep track of such expenses.

General business operating expenses

Included in the category of regular business costs that qualify for a tax write-off are the following:

• The expenses associated with advertising and marketing
• Legal expenditures
• Costs associated with accounting and submitting tax returns
• Bank fees
• Insurance premiums
• The interest paid on loans to businesses
• Charges paid on a recurring basis for software
• Standardized charges

Repair and maintenance expenses

You are eligible to take a tax deduction for the money you spend on work-related repairs and maintenance if you have to pay for it. These are the following:

• Fixing computers and other pieces of equipment
• Repairs to the machinery
• Painting
• Repairs to electrical and plumbing fixtures and appliances

To be eligible for a deduction, it is not necessary for you to own the piece of property or the item that is being fixed or maintained. However, the repairs or maintenance that you conduct must be relevant to your company.

Assets that are declining in value

When the value of an asset decreases over time, we refer to that item as depreciating. These are the following:

• Computers
• Automobiles and other vehicles
• The apparatus and equipment used in offices
• Furniture, carpet and curtains

Individuals who operate their businesses on their own and freelancers who have annual turnovers of less than $500 million are eligible to claim an immediate deduction for assets that cost less than $150,000 in the same year they are bought.

For instance, if you purchase office equipment throughout the year that costs $10,000, you are eligible to deduct the whole $10,000 from your taxable income for the year if you itemise your deductions on your tax return.

This barrier was raised not too long ago to assist firms in weathering the economic effect of COVID-19 and recovering from it.

For more details, please refer to the government’s guide on the immediate write-off of assets.

Only broad inferences may be drawn from this. Talk to an accountant, a registered tax agent, or the ATO to get guidance on whether deductions are applicable to your company and how to claim them.

What Can’t Sole Traders Claim?

You will need to proceed with caution if you want to remain in good standing with the ATO and ensure that you are only claiming legitimately relevant deductions to your business.

Some of the most widespread misunderstandings which might lead single proprietors to make some costly mistakes:

• If you use anything for personal and commercial purposes, you are required to allocate the costs and have documents to back up the percentage of the expense you claim as deductible. You are not allowed to claim the whole amount of any item. EXAMPLE: the cost of a cellular phone or internet service.
• Car expenditures do require a logbook. If you use your automobile for work, you are required to keep a logbook in the vast majority of situations in order to be eligible to claim actual car expenditures. If you want to deduct up to 5,000 miles on your taxes, you have to be able to supply the Australian Taxation Office with information on how your automobile was used for business purposes.
• Depending on the circumstances, the following guidelines apply to meals and coffees:
• You cannot deduct the cost of meals, coffees, or snacks from your taxes UNLESS the expenses were incurred while travelling overnight for business-related reasons, in which case you must maintain the receipts.
• The ATO considers costs for entertainment to include things like meals and coffees that are consumed during meetings. Therefore, they are NOT deductible for purposes of the GST or income tax UNLESS they are quite modest and occur seldom (or you pay FBT on the expenditures). Again, this is an area in where obtaining sound guidance from a certified tax adviser may be of great assistance.
• Expenses related to travel are tax-deductible to the extent that they are directly related to the operation of the sole proprietorship; all other costs associated with the trip are regarded as personal.
• You will need receipts for the taxes! It is not acceptable to provide either a bank statement or an EFTPOS receipt. In the event that you are subject to an audit, any deductions you claim that are not supported by receipts will be denied. Tip: To deduct the proper amount from your taxes, check that the receipt is readable and clearly indicates what was purchased.

Self-Employment Tax

People who are self-employed are required to pay both the employee and employer portions of Medicare and Social Security taxes. This tax is referred to as the self-employment tax. These taxes must be paid by anybody who earns income, and in 2019, the employee portion is 7.65 percent, while the self-employed portion is 15.30 percent. The following is a breakdown of the various rates: 5

• On the first $132,900 in salary ($137,700 in 2020), both the individual and the employer are responsible for paying 6.2 percent in Social Security tax.
• 1.45 percent of taxable wages goes towards Medicare, split evenly between employees and employers.

In each of the following scenarios, you will be responsible for paying an extra Medicare tax of 0.9%:

• Income-Based on Your Filing Status
• Single -$200,000
• Joint tax return for married couples – $250 000

The income criteria that determine whether or not you are subject to an extra Medicare tax apply to your income from self-employment and the sum of your income from wages, compensation, and self-employment. Therefore, if you have an income of $100,000 from self-employment and your spouse has an income of $160,000 from wage work, you will be required to pay the additional Medicare tax of 0.9 percent on the $10,000 that your joint income is greater than the threshold of $250,000. This tax applies only to the amount by which your joint income is greater than $250,000.

Being your own employer is not worth the additional financial burden of paying taxes. The good news is that the self-employment tax will cost you less than you would think it will since you get to deduct half of your self-employment tax from your nett income. The bad news is that you won’t be able to deduct any of your self-employment tax from your nett income. This is because the ATO considers the “employer” element of your self-employment tax to be a business cost, and as such, you are able to deduct that portion of the tax. In addition, the percentage of your business’s nett revenue, not its gross income, that is subject to self-employment tax is capped at 92.35 percent.

Keep in mind that regardless of who you work for, you are responsible for paying the first 7.65 percent of your salary. When you work for someone else, however, you inadvertently contribute to the employer’s contribution. This is because your employer does not have the financial resources to add that amount to your compensation.

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