As a small business owner in South Africa, navigating tax deductions can be overwhelming. With so many rules and regulations to understand, it can be challenging to know which expenses you can and cannot claim. However, claiming tax deductions is an important part of reducing your overall tax liability and ensuring that your business remains financially viable.
Here, we’ll explore the basics of tax-deductible business expenses, as well as some specific categories of expenses that you can claim as a self-employed individual. We’ll also highlight some important details and nuances to keep in mind when claiming these expenses.
What are tax-deductible business expenses?
Before we get into the nitty-gritty of tax-deductible expenses, let’s first define what a tax-deductible business expense is exactly. According to SARS, tax-deductible business expenses are “expenses incurred in the operation of a business”.
In simpler terms, any expense you incur for the purpose of running your business can be considered a tax-deductible expense. These expenses can include anything from office supplies and equipment to travel expenses and employee salaries.
It’s important to note that not all expenses are tax deductible – SARS has specific guidelines and restrictions on what expenses can be claimed as deductions. For example, personal expenses that are not directly related to the operation of your business cannot be claimed as tax deductions.
Remember to keep detailed records of all your business expenses, including receipts, invoices, and bank statements, to support your tax deductions. These records will help you accurately claim your tax deductions and avoid any issues with SARS.
Types of tax-deductible business expenses
Let’s take a closer look at the different types of tax-deductible business expenses you can claim as an SME owner in South Africa:
- Day-to-day business expenses
Day-to-day business expenses are the regular expenses you incur in running your business. These include expenses such as office rent, utilities, office supplies, equipment, and internet and phone bills. It is worth noting that only the portion of these expenses that relate to your business can be claimed as tax deductions. For example, if you use your personal phone for both personal and business purposes, you can only claim the portion of the phone bill that relates to your business.
- Capital expenses
Capital expenses are the expenses you incur to acquire or improve assets that have a useful life beyond the current financial year. These assets include things like vehicles, machinery, equipment, and property. Capital expenses are generally not fully deductible in the year in which they are incurred, but rather are claimed over the useful life of the asset through depreciation.
- Education expenses
Education expenses incurred for the purpose of improving your skills or knowledge in your business are tax deductible. This includes expenses such as attending courses, conferences, and seminars, as well as purchasing books and other educational materials.
- Entertainment expenses
Expenses for entertaining clients, customers, or suppliers – including drinks, meals, live entertainment, and venue hire – are tax deductible. Nevertheless, you must be able to demonstrate to SARS that these expenses were incurred in pursuit of business.
- Business start-up expenses
These refer to the expenses that were incurred for your business before the commencement of your first year of trade. For instance, if you bought equipment necessary for running your business two months before beginning to trade, you could claim it as a tax-deductible business expense.
- Net operating losses
If your business operates at a loss, you can claim the loss as a tax deduction. A net operating loss occurs when your business expenses exceed your business income. The loss can be carried forward to future tax years and used to reduce your taxable income.
Particulars about different expenses
As mentioned earlier, there are some specific rules and requirements around what does and does not constitute a business expense. For example, a home office must meet specific requirements to be considered tax deductible. It must be a separate room in the house or on the property, used exclusively for trade, used regularly, and equipped to enable your business to function.
The bottom line
Understanding tax-deductible business expenses is crucial to minimising your tax liability. By keeping accurate records and working with a tax professional, you can ensure that you are claiming all the deductions you are entitled to and avoiding any penalties for claiming expenses that are not tax deductible.
If you require funding to cover your business expenses, consider partnering with Sourcefin. As funding and sourcing specialists, we are committed to helping small businesses in South Africa secure the funding they need to scale their operations.
By approving your funding request, Sourcefin aims to support you in delivering on larger purchase orders, which we see as an opportunity for growth. Contact us to learn more about how we can help you take your business to greater heights.
