Navigating Business Expense Deductions

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Running a business comes with its fair share of expenses and it is important to understand when these expenses can be used against income as a valid business tax deductible expense.

Deducting the right expenses can significantly reduce your taxable income and, consequently, your tax liability.

In this blog, we will look into the deductibility of various business expenses, focusing on repairs and maintenance, entertainment, staff welfare, and gifts.

A) Repairs and Maintenance

One of the crucial aspects of keeping a business operational is ensuring that its physical assets are in good condition. Repairs and maintenance costs are often inevitable and unavoidable, whether it's fixing broken machinery, refurbishing premises, or maintaining vehicles.

SARS allows businesses to deduct these expenses, provided they meet certain criteria.

For an expense to qualify for deduction:

  • Necessity: The repair or maintenance should be necessary to keep the asset in its working condition or to restore it to its original state.

  • Revenue Expenditure: The expense should not be a capital expenditure, meaning it should not result in a significant improvement or enhancement of the asset's value. Instead, it should merely maintain the asset's existing condition. If it is an improvement, it doesn’t mean it should be forgotten or not tax deductible. This just means that it is capitalised and included in the assets base cost i.e. cost and when the asset is sold, the Capital Gains Tax will be less.

  • Ordinary Course of Business: The expense should be incurred in the ordinary course of your business operations.

B) Entertainment Expenses

Entertaining clients or potential business partners is a common practice in the business world.

However, not all entertainment expenses are fully deductible under South African tax law. In general, the tax law allows for a 100% deduction for entertainment expenses that meet specific requirements:

  • Business Purpose: The entertainment expense must be directly related to your business operations. It should be clear that the main purpose of the expense is to conduct business discussions, negotiations, or presentations.

  • Documentation: Proper documentation is crucial. Keep records of the date, location, purpose, attendees, and nature of the business discussions during the entertainment event.

  • We recommend using Hubdocs if you are on Xero, and potentially writing on the receipt who you met with or what the purpose was.

Pumeza says – ‘That when SARS asks for the documentation, clients don’t always remember what the expense was for because it is perhaps a year later and life is very busy.’

  • Reasonableness: The expense should be reasonable and aligned with the nature of your business. Extravagant or lavish expenses might raise red flags during tax assessments.

C) Staff Welfare Expenses

Taking care of your employees' welfare is not only a moral obligation but also an expense that can have tax benefits.

SARS recognizes the importance of employee well-being and allows for the deduction of certain staff welfare expenses. These might include:

  • Employee Benefits: Expenses related to employee benefits like medical aid contributions, retirement fund contributions, and group life insurance premiums can be deducted.

  • On-Site Facilities: Costs associated with providing on-site facilities such as staff canteens or recreational areas can also be deductible.

  • Conditions: Ensure that the expenses are provided to all employees on a consistent basis. Exclusivity or preference to certain employees might lead to partial or non-deductibility.

D) Gifts and Donations

The act of giving gifts to clients, suppliers, or employees can foster goodwill and stronger relationships. While SARS allows for the deduction of gifts and donations, there are specific guidelines to follow:

  • Nature of Gifts: The gifts should be given in the ordinary course of business and should be directly related to promoting your business interests. i.e. will bring in more income or make sure that the client remains a client.

  • Limits: There are limits to the amount that can be deducted for gifts and donations. Different rules apply based on the recipient – whether it's a client, supplier, or donation to a public benefit organisation.

  • Remember about section 18A certificates if it is a donation to an organisation as SARS ask for this as proof.

  • Documentation: Maintain accurate records of the gifts given, including the recipient's details, date, and purpose. For donations, obtain valid receipts from the beneficiaries.

Remember, while these guidelines offer a general overview, each business's situation can be unique.

Give us a call or book a meeting with us and we will ensure that you maximise your allowable deductions while staying compliant with the regulations.

By navigating the intricacies of deductible expenses, you can help your business thrive while optimising your tax position. Please also consider using Hubdocs or Xero to keep record of your expenses, especially if you are VAT registered.