What can you claim as income and, more importantly, what are your expenses? This is possibly the simplest part of owning your business, however it often can be a stumbling block when it comes to your monthly bookkeeping so let’s take a brief run through it.
Income, as the name suggests, is all the money your business earns in the course of your business activities. Often many entrepreneurs think they need to have a separate company for each source of activity, but this is not the case. Income can be made up of several different types of activities and does not need to be just from one source.
Expenses, on the other hand, is a bit trickier than income. While SARS is quite eager to include all your sources of income, so as to increase your tax liability, they are not that generous with your expenses. Therefore it is important to note, you can only claim those expenses that are incurred in the production of your income.
With that said the list of expenses that can be claimed is very lengthy, so our recommendation to our clients is to supply us with all the expenses that they have paid for in the course of running their business and we will assist them is sorting out what can be claimed.
Some of the more common misunderstandings we encounter are:
Expenses paid for by the Member / Shareholder – many entrepreneurs wrongly believe that they cannot claim expenses that they themselves have paid for.
Expenses that have been incurred, but not yet paid for – again many entrepreneurs wrongly believe that they cannot claim an expense if they have not yet paid the invoice.
Home Office – not many entrepreneurs realise that they can claim a “rental” expense if they run an office from home.
One of the abnormalities we have with expenses, is regarding fines and penalties (i.e. a form of punishment against the company). While the business does reflect these expenses on their Income Statement as a legitimate expense incurred by the company. These expenses need to be added back to your profit when calculating your income tax liability. It’s clear that SARS’ reasoning here is, they don’t want your business to get a tax advantage if it did something wrong.
So very simply, the above outlines what is viewed as income and expenses in most traditional businesses. While we are aware that there will always be exceptions to any rule, we do recommend that you chat with a qualified advisor when setting up your business.