Do you have your own business? And are very busy running it? Do you know you should get on top of tax for your business, but it’s one of those topics that you feel resistance to or think it will take up too much time? Here are your ten tax essentials to understand and have in place, so you can run your business efficiently and keep the IRD happy.
1. Choosing your business structure
It is very important to choose the correct business structure when you first start out, otherwise it can be costly to change later on. When starting a small business, most people believe they need to have a company structure in place. Not necessary. A company structure may not be the option for everyone.
For example, in the case of a working mum -whose net income or profit for the year is going to be between $15,000 – $25,000- she might need to consider a sole trader structure. We will post more information on this soon (sign up to our Facebook Page to be notified). IRD and Companies Office website provides some information on various structures. Getting expert advice on this at the early stage will save you money and headache later on.
2. Do you need to register for GST in the first year?
Most small businesses are not sure what their income will be in the first year of trading. It can take time to build network and client base. So, do you really need to register for gst when you first start and you don’t know your income for that year? No, keep things simple for yourself. Review your income every quarter and register for gst when you know you are going to earn over $60,000 in one financial year. In NZ, for most small businesses the financial year runs from 1 April to 31 March.
3. Keeping an electronic business records for at least seven years
There is a legal requirement by IRD to keep accurate records. You can either have them in physical form or electronic. Original hard copies do fade away, so remember to make a copy of it. IRD does require to keep the records for at least seven years. It is important for records to be easily readable and organised enough for you or anyone to work through them quickly. Seven years of records can take up a lot of physical storage space so it’s wise to use an electronic system from day one. If you store your records on a computer, be sure to keep backup copies in case your system breaks down. Another bonus to keeping good records is your agent or accountant will spend less time preparing your accounts – means less cost to you.
4. Try accounting software
When you are first starting, the thought of using accounting software, the cost involved, training required and technical jargon can put you off. Many small businesses rather do their invoices at the end of each month and spend hours on Word and Excel to send invoices to clients. You can make this simpler for yourselves and save a lot of time by investing in something more efficient so that your partner can even do your invoicing when you are down with a cold. There are so many different and affordable online accounting packages available that support a small business, such as Xero and MYOB. Most of them offer a free trial so you can see how it can help you before fully committing. What have you got to lose?
5. Separate your personal and business bank account
Having a separate account for your business will help you analyse your income and expenses more easily when the time comes to do your returns. If you are a sole trader, you easily can create a new business suffix under your personal banking and use that only for your business income and expenses. Set an amount each week or month from your business account and transfer that to your household account to cover for your personal account to keep things separate. Again, this will help you or your accountant save time preparing your returns – which means less accounting fees.
6. Prepare for your end of year tax bill: put money aside each month and file your returns on time
All that income is great, but don’t forget that a portion of that is tax which has to be paid at the end of the tax year. Be ready for your end of year tax bill by putting some money aside each month, based on the income you received. This way you’ll never be short of money to pay your tax bill.
Also, avoid interest and penalties by filing your returns on time. Pay by online banking – it is easier and quicker. If paying by cheque, send it at least a week before the due date to avoid any risk of late penalties. Ring IRD if you miss a payment or are not able to pay (IRD 0800 377 772) to discuss what options are available.
It’s worth looking into an app like TaxBuddy that can help to calculate how much money to put aside each month. Instead of just guessing an amount, you want this amount to be as accurate as possible; to avoid being short or to support cashflow throughout the year. It even takes your deductibles in account, and reminds you when important deadlines are coming up. Check out www.taxbuddy.nz
7. Paying for business expenses from your pocket money
It is hard to pay each and everything from your business account. It’s easy to pay cash for small items like coffee during a meeting, or tea and milk for the office. However, these little things add up during the year. You could consider a shoe box, or an envelope in your car to keep receipts of small items you pay from your own money. This way you keep it in one place and it will be easy to process at the end of the month. For those of you who love technology, use apps like Xero and capture the details of the invoice instantly as it happens. Read here for more information on the Xero mobile app.
8. Claim your home office expenses
Even if you have a business premise, you could set up a small office at home and claim deductions. For more detailed information, read our blog on ‘claiming expenses for your home office’ here.
9. Deductions for donations
If you or your business makes a charitable donation, you can claim tax credits on that. Keep any tax receipts and invoices. Check on IRD website if the organisation is a IRD approved donee.
10. Ask for help
Many start-up businesses are restricted with resources and money, so they tend to do it all themselves. Not a bad idea in the early days since the business is so small, and today we have many tools and options out there which can be very helpful. Just remember that for some things it’s good to invest in expert advice, such as business structure. Getting things like that right from the start, will save you lots of headaches, time and money in the future.
For many small business owners anything ‘tax’ can be scary and overwhelming, especially when you are doing it all yourself. Getting these ten things right will go a long way in having a smoother tax year.