In this video, we explain the difference between revenue and capital expenses and what you can claim in your income tax return.

You need to understand how expenses work, because they’re an important part of your tax calculation. When you complete you return, you record your gross sales for the year, and deduct your business expenses. This will give you your net profit. You pay income tax on your taxable income, which will be your next profit plus any additional income. “You must keep a record of your expenses as you go. A cashbook is a good way to keep track of your expenses, and your income. Please retain all invoices and receipts. If you’re audited, and the paperwork is missing, your claim may be disallowed. You can keep records electronically. Make sure you keep a backup copy and you can produce the information easily when necessary. Good record keeping will also help you manage your business better, and you’ll find it easier to raise finance.

To explain the difference between revenue expenses and capital expenses, let’s have a look at Alice’s office. Revenue expenses are incurred in the day-to-day running of the business, like stationery, rent, power and your ACC levies. Capital expenses are big-ticket items that you keep in your business for longer than a year. Common examples include computers, motor vehicles, and machinery. You can’t claim a deduction for a capital expense – instead you claim depreciation.

If you’re not sure whether an item is a revenue or capital expense, ask yourself these two questions. Is it worth more than $500? And does it have an expected life of more than 12 months? If your answer to both questions is “yes”, the item is probably a capital expense. Please see our depreciation video for more information about depreciation of capital expenses.

Revenue expenses can be deducted from your gross income provided the expense relates to your business. Private expenses are not deductible.

If the expense is partly business and partly private, you need to make an adjustment to ensure you’re only claiming the business percentage. Let’s look at an example of a private use adjustment. Alice has an office based in her home. As she has set aside this office exclusively for business use, she is able to claim a percentage of her household expenses in her tax return. Common examples of expenses include: rates, insurance, power, rent, or interest on your mortgage. So what percentage can you claim? It’s based on floor area. Alice’s office is 10% of the total floor area of her home. She can claim 10% of the household expenses she uses for business.

Many people use their car for business, and for private use. You can keep a logbook to work out your private use adjustment. Record each trip you make, both business and private. After three months, work out the number of kilometres you travelled on business and compare this figure to the total kilometres travelled. This is the percentage of your motor vehicle expenses you can claim in your tax return. You can use this percentage for three years. After three years is up, you need to keep a logbook again, for another three-month period.

If your business trips come to 5,000 kilometres or less for the year, there’s another way you can work out your deduction for motor vehicle expenses. Keep a record of all the kilometres you travel on business, and calculate your claim based on Inland Revenue or the Automobile Association’s mileage rates. You may need to make private use adjustments for other expenses too, like telephone expenses and entertainment.
To find out more information about expenses please visit our website. Our “Tool for business” has everything you need in one convenient place including a cash book template you can download and a printable vehicle log book. To find out about your ACC levies check out ACC’s website. And go to business.govt.nz to access further tools and resources for starting in business.