What can be a ‘Business Expense’?

Many of us need to incur costs when we start making things. It might be to buy a new tool, some materials, or top up your Felt account to list some new items. Heading into Christmas there will be a lot of wrapping and postage costs also.

All of these costs are expenses that can be used to offset the amount of tax you have to pay (if you’re profitable) or can be used to offset your tax if you’re not profitable. Great news!

A few weeks ago we worked with our friends at Fairground Accounting to put together an Accounting Cheat Sheet for creative designer/makers like you. There are a lot of myths out there about money and small business, and we wanted to make it easy and dispel them. You can download the whole thing here, and below I’ve gone into more detail on the ‘expenses’ section.

What counts as an expense?

When it comes to paying for things for your creative endeavours, any cost that’s necessary to run your business will probably be tax deductible – regardless of whether you’re GST registered or have set anything up formally or not. If you want to claim it as an expense you need to get a tax receipt – a receipt with the GST breakdown on it, or one clearly marked ‘Tax invoice’ – and keep it on record for seven years. I personally prefer to take photos of receipts and sync them to the cloud, but it’s your responsibility to ensure you have access to them either physically or in digital form.

There is a grey area around what counts as ‘necessary’ for your business, as this can be quite a subjective thing. It can be helpful to think about it this way: would I be paying for this if I WASN’T doing my work? If not, then it’s an expense. This can be a hard question for many of us, as a lot of the time our hobby and our craft/work are closely related. “Maybe I would still pay for this as a hobby”. You need to use your judgement about what is fair and reasonable to claim, or ask for professional advice from an accountant if you’re really stuck. If you can clearly connect the purchase with the business side of your creative endeavours and it is genuinely a cost that helps with your work then it counts as a business expense. Typically this list of things might include:

  • tools and equipment
  • materials (e.g. clay, timber, linen, canvas, silver…)
  • consumables like glue, cotton, paint, or sandpaper
  • safety equipment or clothing used for your craft
  • postage and packaging costs
  • stationary and office supplies
  • Felt account Top ups
  • any social media promotion costs
  • mobile phone expenses (if you use it for your work)
  • workshop/office space rental (if you use one)
  • professional development fees – classes, workshops, presentations or online courses you may be attending
  • market stall fees

If you work from home, you may be able to claim a proportion of your home costs too. This calculation can be done once a year, and I’d recommend talking to an accountant about it if you work from home. The basic idea is that you measure out the proportion of the floor area of your house that you use exclusively for your work, and you can claim that percentage of costs associated with the house. Cost might include:

  • rent/mortgage payments
  • power and water utilities
  • internet
  • insurance

Again, it is worth talking to an accountant if you want to do this, as there are some nuances to be aware of.

What is the benefit of claiming expenses?

The real benefit of tracking your expenses is all about tax. If your business is profitable, the tax you pay takes into account the costs incurred in making that money – you can end up paying less tax. If you’re NOT profitable then you may be eligible for a tax refund. This is a really helpful thing to know at the start of your journey into being a creative professional – even if you’re not set up formally you can still claim back tax for expenses incurred establishing yourself in business.

How do I start?

The simplest easiest way to manage all of this is to set up separate bank accounts for your creative work. Most banks will let you set up another account for free, and it can help to attach it to one of your existing eftpos or debit cards for easy purchases (keep the GST receipt). If you’re looking at doing this fairly seriously then consider setting up another account for Tax, and every time you make some money, throw a portion of it into that account to prepare for paying tax.

The second part is to start tracking your income and expenses ready for tax returns. There are a bunch of suggestions in the cheat sheet that range from free excel templates to subscription services like Xero or MYOB.

 

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