• New Wave Accountants

Accounting 101: Understanding How Tax Write-Offs Work – Part 1

As a business owner, knowing about how taxes work is crucial for your business’s success and continued operation. One particularly important component you need to really focus on is your tax write-offs. Every write-off scenario will be different, but knowing what kind of deductions you can go for can make a big difference to your business. We bring your this two-part guide on how tax write-offs work so you know exactly what you’re up against.


What is a Tax Write-Off?


A business tax write-off is any business expense that can be deducted from your taxable income when you complete your tax return. Basically, all those write-offs can help you increase your tax refund and get back some of the money you paid for your business tax.


As a responsible business owner, keeping track of your taxes and lodging your returns isn’t the only thing you need to do for your business. You also need to be meticulous about claiming a tax deduction for the majority of your business expenses, as the money you get from those deductions can be used to operate and grow your business. The only question is, what constitutes an eligible deduction for your work-related expenses?


How do Tax Deductions Work?


Firstly, it’s essential for you to know that tax deductions aren’t a way for you to get the entire cost back from the Australian Tax Office (ATO) when you lodge your tax return. The goal of these write-offs is to reduce your assessable income and get part of the costs back for deductible items. Generally, you can claim a deduction on the following:


  • Operating Expenses - These are expenses that you’ve incurred for the purpose of operating your business. Examples of operating expenses include rent, insurance, business travel expenses, as well as office and home expenses.

  • Capital Expenses - These are expenses over a long period of time, such as equipment and machinery.


Remember, these are only business expenses and should never be mixed together with your personal expenses. Otherwise, you could get in trouble with the ATO.


How Does a Write-Off Lower Your Taxable Income?


To better illustrate how write-offs work, let’s use a simple calculation as an example. Suppose your business managed to earn $120,000 last year. Upon looking at all your write-offs, you’re able to claim $30,000 worth of tax deductions. That just means that your taxable income for the year would be $90,000.


What is an Instant Asset Write-Off?


An instant asset write-off allows small businesses to claim immediate deductions for the portion of the cost of an asset that is attributable to business use. This could include second-hand equipment asset purchases, such as vehicles, tools, and office equipment. Not all businesses are eligible for this, and the ATO has implemented a threshold to determine if you’re business is eligible or not. You need to check your business’s eligibility first and apply the correct threshold before you can be considered for an instant asset write-off.


Conclusion


That concludes the first part of our guide on tax write-offs. Essentially, these deductions can be of great help, so you don’t have to pay an excessive amount of taxes based on your taxable income. By knowing how tax write-offs work, you can focus more on the growth of your business.


Whether you’re a new business owner or looking to expand your business, New Wave Accounting is here to help you reach your goals. Our tax accountants in Gold Coast are ready to provide an effective growth strategy to help your business grow. Get in touch with us today to book a consultation with us!



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