Ministry of Revenue & Customs

Most businesses incur expenses when earning their income and most of these can be deducted from its income  to arrive at its net profit or taxable income. It is on this amount that  you pay income tax. Certain business expenses that are paid for out of  business income cannot be claimed as allowable business expenses such  as

Business expenses

All businesses have expenses in generating  taxable income.Most expenses that are part of the cost of running your business are tax-deductible, except for the cost of buying capital  assets for the business.

You can claim depreciation on the cost of the capital assets, to allow for their decline in value.

Tax-deductible expenses

Some examples of tax-deductible expenses include accident compensation levies salary and wages

• rent

• rates

• stationery and supplies

• accountants E28099 fees

• purchase of trading stock

• repairs and maintenance on business items

• electricity and telephone costs

• interest on money borrowed for the business

• insurance of business assets or premises

• business vehicle and transport costs

• donations limited to $1,000

• Sponsorship limited to 5% of gross sales/turnover.

Non-deductible expenses

Some business expenses paid out of business  income can E28099t be claimed as an income tax deduction.If your business borrows money, the capital part of the the loan repayments is not a  deductible expense (but the interest probably will be). Likewise,the loan is not taxable income. Income tax that the business pays is not a deductible expense, and tax refunds are not taxable income. Drawings are   not a deductible expense, and money that you introduce into the business is not taxable income. Some examples of other non-deductible expenses include:

• legal fees incurred in setting up a business     

• the cost of plant and machinery

• improvements to equipment apart from repairs and maintenance.

• private expenses such as life insurance and the % of expenses for private use - e.g., electricity; vehicle, phone etc

Capital expenses

Its important to be able to tell the difference between capital and

 revenue expenses. This is because revenue expenses are  deductible while capital expenses generally are not. Capital expenses   are usually one- off payments to buy assets that will be used in the  business. You cant claim the full cost of capital items in the year they were purchased.  Instead, their cost can be written off over a   number of years. For more information below.

 Depreciation

Depreciation allows for the wear and tear on a  fixed asset and must be deducted from your income. You must claim   depreciation on fixed assets used in your business that have a useful   lifespan of more than 12 months. Not all fixed assets can be   depreciated. Land is a common example of a fixed asset that cannot be  depreciated.

Straight line

Each year you claim a set percentage of the   asset E28099s original cost. This percentage is set so that the depreciation you claim over an asset E2099s expected useful life works out to its original  cost at the time you acquired it.

Example

Using the straight line method to depreciate the dishwasher in Example 1.

Original Depreciation D

• Year 1 $1,200 21.6% $259.20 $940.80

• Year 2 $1,200 21.6% $259.20 $681.60

• Year 3 $1,200 21.6% $259.20 $422.40

• Year 4 $1,200 21.6% $259.20 $163.20

• Year 5 $1,200 21.6% $163.20 $ 0.00

Diminishing value method

Using this method, the amount of depreciation is worked out on the adjusted tax value of the asset. This value is  the  original cost price (including CT) less any depreciation already claimed in previous years.

Example

Using diminishing value method Asset: Dishwasher E28093 purchased before 1 April 2005 Cost: $1,200 Depreciation rate: 31.2%

Value at Adjusted Depreciation year

• Year 1 $1,200.00 31.2% $374.40 $825.60

• Year 2 $825.60 31.2% $257.59 $568.01

• Year 3 $568.01 31.2% $177.22 $390.79

• Year 4 $390.79 31.2% $121.93 $268.86

• Year 5 $268.86 31.2% $83.88 $184.98

  DEPRECIATION RATE:

These are contained in Schedule 2 of the Income Tax Act 2007.  The depreciation rates specified for the purposes of section 28 and 29 shall be

	Depreciation Rate
	Diminishing value	Straight-line
Motor vehicles; buses and minibuses with a seating capacity of less than 30 passengers; goods vehicles with a load capacity of less than 7 tonnes; computers and data handling equipment; and construction equipment and earthmoving equipment	40%	25%
Buses with a seating capacity of 30 or more passengers; goods vehicles designed to carry or pull loads of more than 7 or more tonnes; specialised trucks; tractors; trailers and trailer-mounted containers; and plant and machinery used in manufacturing, mining, or farming operations	30%	20%
Vessels, barges, tugs, and similar water transportation equipment; aircraft; specialised public utility plant, equipment, and machinery; office furniture, fixtures, and equipment; and any depreciable asset not included in another category	20%	12.5%
Buildings/Structural Improvements		5%

If you require more information about income see Publication – Deduction Provisions of the Income Tax Act 2007.