Business expenses and how to claim them

Leather Wallet by Honey Bird Leathercraft

Making things inevitably costs money. You spend on materials, tools, and classes, and sometimes the outgoings can seem endless. But when you’re making things to sell, these are the costs of doing business – otherwise known as business expenses! When you keep track of these costs and include them in your tax return, they reduce the amount of tax you pay.

Why should you claim your expenses?

If you choose to sell your work through Felt or other channels, you must file a tax return at the end of the year to report any income you earn to the IRD, and work out how much tax you owe.

Tax is paid only on the profit you make – that is, the total amount of income you received from running your business, minus any expenses you incurred by doing so. Claiming expenses lowers your profit, and therefore the total amount of tax you have to pay.

For example:

Total income $100
Minus expenses -$20
Profit (taxable income) $80

Nobody wants to pay more tax than they have to, so it’s worth spending a little time ensuring you’ve claimed all of the expenses you’re entitled to.

What counts as an expense?

Any cost that’s necessary to run your business will probably be tax deductible – whether you’re self-employed or running a registered company. To claim something as an expense, you need a receipt or invoice for the item or service, and you must keep it on record for seven years.

Your business expenses may include things such as:

  • component materials for making your product
  • consumables such as glue, thread, paint, or sandpaper
  • safety equipment used for your craft
  • postage and packaging costs
  • stationery and office supplies
  • listing fees, sales commission, and merchant fees
  • advertising and promotion
  • mobile phone expenses
  • workshop/office space rental
  • professional development – classes, workshops, events, or online courses
  • market stall fees
  • tools and equipment*

*Tools and equipment used to make your products are considered assets. Generally, you can count low value assets as an expense if they cost less than $1000. If they cost more than this, you must depreciate them over their useful lifetime, and the depreciation becomes an expense. The IRD has more information about this here »

If you work from home, you can also apportion a percentage of your home expenses as a business expense. This is calculated based on the floor area of your home that you use for your business – read more from the IRD about calculating home office expenses here »

Home expenses may include:

  • rent/mortgage
  • rates
  • utilities
  • insurance
  • phone and internet

Where to start

It’s easiest to start out with separate bank accounts for your business, so you have a record of all your business-related transactions in one place. Most banks will let you set up another account for free. It’s helpful to have one account for income and expenses, and a savings account to put aside money for tax.

A physical or electronic cash book, or accounting software package such as Xero or MYOB can be useful for tracking your income and expenses during the year. Read more about record keeping here »

It’s your responsibility to ensure you keep copies of bank statements, receipts, and invoices in either physical or digital form for seven years.

TIP Take photos of receipts and save them to the cloud for easy filing when you’re busy, and easy retrieval when you need them.

Business expenses can be daunting, and can get complicated depending on your circumstances. Finding a good accountant who can give you advice and ensure that you’re meeting all of your tax obligations is a great idea. Xero has a handy tool on their site, to match you with a suitable accountant in your area of NZ – check it out here »

The IRD also has plenty of resources on expenses and tax for everyone, whether you’re a sole trader or have a registered company. Find more information here »