Deducting Miscellaneous Business Expenses

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DEDUCTING MISCELLANEOUS BUSINESS EXPENSES
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What counts as a business expense and when can you deduct it from your income? Our article provides a hands-on explanation.
The type of business expenses that an individual can claim as a deduction depends on the type of taxpayer they are, or in other words, the nature of their income. There are broadly three types of individual taxpayers:
Self-employed entrepreneurs
Commission earners
Salary earners
Broadly speaking, the first two types of taxpayers have a fair amount of leeway with regard to the business expenses they can claim, while the deductions allowable for salary earners are relatively limited.
Let us now look at each type of taxpayer in more detail to understand the nature of their income as well as the rules around the business expenses they can claim.
Self-employed entrepreneurs
These are taxpayers who work for themselves and do not earn a salary. They run their own businesses (or sole proprietorships) and may also call themselves freelancers or independent contractors.
All of their business income and expenses are included within the local business section of their personal tax return.
This type of taxpayer can claim all typical business expenses incurred in the production of their business income. This is a rather broad category and could include anything from purchasing stock to paying for coffee and parking while attending a business breakfast. Essentially the rule of thumb is that in order to claim, they will have to have incurred expenses in direct relation to earning income.
Typical business expenses could include:
• Accounting and bookkeeping costs
• Internet: Costs to run and maintain the system or send emails
• Insurance costs: Professional indemnity insurance or insurance on your office building
• Licences: Those that apply to the business
• Maintenance and repairs of business equipment or the office
• Motor vehicle costs: Maintenance, repairs and licences (Costs should be allocated between personal and business usage based on mileage recorded in a logbook)
• Printing and stationery: Letterheads and business cards
• Delivery and freight
• Depreciation or wear and tear: For business assets that lose value while in use by a business, e.g., computers
• Entertainment: Normally food and beverages paid for by the business to entertain people important to the business, such as customers and suppliers
• Electricity and water: Costs associated with the business’s premises and the equipment use
• Rent or rates and taxes: For leasing your business’s premises
• Rent: For any leased equipment or signage used by the business
• Security: Costs for security services such as alarm monitoring, armed response or armed guards
• Subcontractors: Other parties that have provided services for your business related to the product, services and sales
• Telephone and fax or communication: Fixed line and cellular phone costs
Commission earners
These types of taxpayers work for someone and are thus employed. However, their income is made up primarily of commission. This means that on their IRP5, their commission income (source code 3606) must be more than 50% of their total remuneration (source code 3699). SARS will allow commission earners to deduct all of their commission related expenses against their commission income. These expenses may include telephone, travel costs, stationery, employee costs, depreciation (wear and tear) and entertainment. Be warned that SARS may flag your return for verification and you will have to prove the legitimacy of each expense – they are particularly strict around the area of entertainment expenses as this can be a “grey” area, which can be abused.
Salary earners
Unlike self-employed entrepreneurs and commission earners, salaried employees are very limited by tax law in terms of what business expenses they can deduct from their income. The main expenses they may be able to deduct are the following, but only if certain conditions are met:
• Wear and tear on personal assets
• Home office expenses
• Vehicle costs only if a travel allowance (source code 3701 or 3702) is received
How to calculate the deduction
Many entrepreneurs may have expenses that are part business and part personal – such as cell phone usage costs, rent, and petrol – and try to claim these in their entirety as a deduction. SARS is on the lookout for these claims and will heavily punish any chancers, so make sure only business expenses are claimed. In order to do this, you will need to identify exactly what portion relates to business use and which portion is personal. If you are claiming vehicle costs, for example, be sure to keep a logbook where you record all business mileage. Keep a record of all your calculations as well as all invoices and receipts. It is very likely that SARS will want to review these in order to verify the business expenses that you claimed.
Wear and tear (depreciation)
This is a common deduction that is available to all types of taxpayers. For entrepreneurs and commission earners, the rules are fairly straightforward. If they use business assets, which decrease in value, SARS allows this reduction in value to be expensed based on the prescribed rates per SARS Interpretation Note 47.
If salaried employees make use of personal devices (e.g., laptops and cell phones), which they purchased and maintained in their personal capacity for work purposes, they too may be able to claim the depreciation as a tax deduction.
Their deduction is subject to a letter from their company stating that they have express permission to use the device for work purposes, and that they are not being compensated by an allowance to maintain such a device. Taxpayers will have to estimate the ratio of business to personal use for their device and then claim the business portion only in their tax return.
Rental property owners can also reduce the tax payable on their rental income by depreciating furniture used within the property. If they have fitted it out with tables, chairs and beds, for example, these items will need to be replaced eventually at a future cost to them. They can therefore claim wear and tear on such items valued above R7000, also using the SARS prescribed rates. Note, that low-value items below R7000 are usually expensed in the year they are purchased.
Supporting documents
After taxpayers submit their tax return, SARS may request certain documents for verification purposes. As a general guide, please note that SARS will not accept schedules or lists of expenses alone. They will require scanned copies of all invoices and receipts (proof of payments) to back up each expense that is claimed. Taxpayers must make sure that they reconcile their supporting documents back to the total expense claimed in their tax return. They also need to submit all calculations and make sure they are clear and easy for SARS to review, e.g., home office and wear and tear.
If the supporting documents are incomplete or do not tally back to the tax return, SARS may well disallow the tax deduction altogether and issue a revised assessment with a whole lot more tax to pay. It will then be up to the taxpayer to dispute the assessment and submit documents again, which will delay the finalisation of their tax return and can take many months to resolve. It is therefore very important to be as thorough as possible when submitting supporting documents to SARS.
To clear up any confusion, please check the table below, which lists the most common business expenses, and the exact documents that SARS requires based on the type of taxpayer that is claiming the expense.
EXPENSE SELF-EMPLOYED ENTREPRENEURS Sole Proprietor / freelancer / independent contractor COMMISSION EARNERS Commission income makes up more than 50% of your remuneration SALARY EARNERS
Depreciation on business assets (e.g., laptop) • Proof of purchase (invoice)
• Calculation showing how wear and tear was calculated and apportioned between business and personal use • Proof of purchase (invoice)
• Calculation showing how wear and tear was calculated and apportioned between business and personal use
• Letter from employer stating you can use personal laptop for work • Proof of purchase (invoice)
• Calculation showing how wear and tear was calculated and apportioned between business and personal use
• Letter from employer stating you can use personal laptop for work
Travel • Logbook with details of business mileage
• Vehicle purchase invoice( if applicable)
• Fuel, maintenance, licence, insurance invoices • Logbook with details of business mileage
• Vehicle purchase invoice (if applicable)
• Fuel, maintenance, licence, insurance invoices * Logbook with details of business mileage
Uber costs Uber receipt (email) Uber receipt (email) Cannot claim
Bank charges Bank Statement reflecting bank charges for your business account Bank Statement reflecting bank charges for your business account Cannot claim
Entertainment • Schedule of entertainment expenses, showing details for each claim, e.g. names of people, purpose of meeting
• Restaurant invoices/receipts • Schedule of entertainment expenses, showing details for each claim, e.g. names of people, purpose of meeting
• Restaurant invoices/receipts Cannot claim
Telephone • Sample of actual monthly invoices
• Calculation showing how the total expense was apportioned between business and personal use • Sample of actual monthly invoices
• Calculation showing how the total expense was apportioned between business and personal use Cannot claim
Salaried employee can only claim travel expenditure if a travel allowance (source code 3701 or 3702), or use of company car (3802 or 3816) fringe benefit, is received.

How to calculate the deduction
Many entrepreneurs may have expenses that are part business and part personal – such as cell phone usage costs, rent, and petrol – and try to claim these in their entirety as a deduction. SARS is on the lookout for these claims and will heavily punish any chancers, so make sure only business expenses are claimed. In order to do this, you will need to identify exactly what portion relates to business use and which portion is personal. If you are claiming vehicle costs, for example, be sure to keep a logbook where you record all business mileage. Keep a record of all your calculations as well as all invoices and receipts. It is very likely that SARS will want to review these in order to verify the business expenses that you claimed.

Wear and tear (depreciation)
This is a common deduction that is available to all types of taxpayers. For entrepreneurs and commission earners, the rules are fairly straightforward. If they use business assets, which decrease in value, SARS allows this reduction in value to be expensed based on the prescribed rates per SARS Interpretation Note 47.

If salaried employees make use of personal devices (e.g., laptops and cell phones), which they purchased and maintained in their personal capacity for work purposes, they too may be able to claim the depreciation as a tax deduction.

Their deduction is subject to a letter from their company stating that they have express permission to use the device for work purposes, and that they are not being compensated by an allowance to maintain such a device. Taxpayers will have to estimate the ratio of business to personal use for their device and then claim the business portion only in their tax return.

Rental property owners can also reduce the tax payable on their rental income by depreciating furniture used within the property. If they have fitted it out with tables, chairs and beds, for example, these items will need to be replaced eventually at a future cost to them. They can therefore claim wear and tear on such items valued above R7000, also using the SARS prescribed rates. Note, that low-value items below R7000 are usually expensed in the year they are purchased.

Supporting documents
After taxpayers submit their tax return, SARS may request certain documents for verification purposes. As a general guide, please note that SARS will not accept schedules or lists of expenses alone. They will require scanned copies of all invoices and receipts (proof of payments) to back up each expense that is claimed. Taxpayers must make sure that they reconcile their supporting documents back to the total expense claimed in their tax return. They also need to submit all calculations and make sure they are clear and easy for SARS to review, e.g., home office and wear and tear.

If the supporting documents are incomplete or do not tally back to the tax return, SARS may well disallow the tax deduction altogether and issue a revised assessment with a whole lot more tax to pay. It will then be up to the taxpayer to dispute the assessment and submit documents again, which will delay the finalisation of their tax return and can take many months to resolve. It is therefore very important to be as thorough as possible when submitting supporting documents to SARS.

To clear up any confusion, please check the table below, which lists the most common business expenses, and the exact documents that SARS requires based on the type of taxpayer that is claiming the expense.

* Salaried employee can only claim travel expenditure if a travel allowance (source code 3701 or 3702), or use of company car (3802 or 3816) fringe benefit, is received

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