Top Business Expense Deductions SMEs Might Be Missing
Running a small business typically involves constant demands like serving customers, managing employees, balancing cash flow and finding ways to stay competitive. Beyond the above, tax time is an annual concern for SMEs. Unfortunately, many small business owners could miss out on legitimate business expense deductions simply because they are unaware of them or assume the amounts involved are too small to worry about.
However, these missed deductions can potentially add up to thousands of dollars that could potentially have been reinvested into growth over time.
Brokers supporting SME clients may want to consider finding deduction opportunities to offer extra value to their clients.
This blog post will explore key business expense deductions that are often overlooked and show how brokers can potentially help their clients keep more of what they earn.
Business Expense Deductions: Quick Rundown
Business expense deductions allow an SME to make an immediate deduction and subtract certain costs directly from its assessable income, lowering the amount of tax owed.
However, not every business cost is deductible. Expenses must meet specific conditions outlined by the ATO (Australian Taxation Office). Broadly speaking, the rules say:
- The expense must be directly related to earning income.
- It must not be private or domestic in nature.
- It must be appropriately documented with receipts, invoices, or detailed records.
Understanding what is and isn’t deductible and helping clients avoid grey areas could have a big impact on when they lodge their returns.
When Can You Claim A Business Expense Deduction?
Timing matters when claiming deductions. An expense is generally deductible when:
- It is incurred (i.e., the SME is legally committed to paying it), even if payment happens later.
- It is for a business purpose and not private use.
- It relates to the income year being assessed.
Some expenses are immediately deductible (like office supplies), while others (like capital assets) may need to be depreciated or fall under specific provisions like the Instant Asset Write-Off.
For example, suppose a business orders and receives a laptop in June but doesn’t pay until July. In that case, the deduction can still typically be claimed for the prior year, depending on the accounting method used. This distinction is essential for SMEs operating close to EOFY deadlines.
Proper record keeping and clarity on when expenses are incurred versus when they are paid can potentially prevent errors that delay tax benefits.
Brokers may want to consider adding value by encouraging clients to keep clean records and understanding the difference between expenses incurred and paid. The above may help with avoiding previously missed deductions or audit trouble later on.
Common Mistakes When Claiming Deductions
Even with the best intentions, SMEs may make simple mistakes that cost them at tax time, like the following:
- Claiming GST-inclusive expenses incorrectly if the business and its supplier are GST-registered.
- Not apportioning expenses correctly between private and business use.
- Failing to maintain proper records leads to disallowed claims during audits.
- Confusing capital and operating expenses, misclassifying purchases that should be depreciated.
Brokers can consider encouraging clients to use cloud-based accounting systems that automate much of this compliance work, and to work closely with qualified accountants before June 30 each year.
Business Expense Deductions To Keep In Mind
Many SMEs focus on large, obvious deductions but overlook less glamorous categories that add up quickly. Here are key areas brokers could consider flagging with their clients.
Another way businesses can deal with extra expenses is by considering small business loans from Lumi. Check out some of our offerings here.
Instant Asset Write-Off (IAWO)
The Instant Asset Write-off (IAWO) remains one of the most important opportunities for SMEs to boost their cash flow come tax time.
Eligible businesses with an aggregated turnover under $10 million can instantly deduct the full cost of each asset costing less than $20,000, rather than spreading the deduction over multiple years through depreciation. Note that the $20,000 figure only applies for the financial year 2024-2025.
There’s no limit on the number of assets claimed as long as each asset falls under the threshold. Assets could include:
- Office equipment, like printers and computers.
- Work vehicles (excluding luxury cars).
- Tools and machinery.
To qualify, the asset must first be used or installed and ready for use within the financial year. Brokers can remind their clients not to wait until June 30 as delayed installation could push the deduction into the next year.
This provision is particularly powerful for small businesses reinvesting heavily in tools, vehicles or technology.
Bad Debt (Accruals-Based Accounting)
Bad debts are another deduction that may be missed. Businesses operating on an accrual basis report income when it is invoiced, not when it is paid.
Writing off bad debts can potentially deliver much-needed tax relief for SMEs operating under accrual accounting. Under ATO rules, a debt previously recorded as income that becomes unrecoverable can be written off and claimed as a deduction.
Requirements to be able to claim a deduction for bad debt include:
- The debt must have been previously included in income.
- There must be no reasonable expectation of recovery.
- The debt must be written off before the end of the financial year.
Documenting collection efforts, such as reminder letters, debt collection notices or court filings, may strengthen an SME’s claim.
Examples of efforts include sending collection notices, legal demands or employing debt collection agencies. Note that the business must genuinely believe recovery is no longer possible.
Brokers can prompt clients to review aged receivables before EOFY and act quickly on old debts.
Digital Product Expenses
The digitisation of business operations has opened a new field of deductible expenses. Now, digital assets and expenses related to them can be claimed as tax deductions.
Everyday deductible digital expenses include:
- Software-as-a-Service (SaaS) subscription fees (e.g., Xero, QuickBooks, Shopify, Canva).
- Cloud storage fees (e.g., Dropbox, Google Drive).
- Cybersecurity software for protecting business data.
- Website hosting and domain name renewals.
However, major website development costs are typically considered capital expenses. Small subscription services and regular maintenance are generally immediately deductible.
As digital transformation accelerates, brokers can suggest that clients keep a digital subscription ledger to ensure that they can correctly claim every eligible service.
Mixed-Use Assets
Many SMEs acquire assets for both business and private use. In these cases, the general rule is that the business portion is counted as a valid business deduction if properly calculated.
Examples of mixed-use assets eligible to claim a tax deduction include:
- A personal vehicle used 70% for business purposes allows 70% of running costs (fuel, insurance, registration) to be deductible.
- Home office internet that is used 60% of the time for business-related activities may allow for a 60% deduction on the relevant bills.
Record keeping is essential to be able to claim these allowable deductions. SMEs will likely need to maintain evidence like logbooks (for vehicles) or itemised bills and make reasonable estimates where exact usage is hard to track.
To justify the mixed-use claims, brokers can encourage clients to keep daily records for at least 12 continuous weeks, a logbook period accepted by the ATO.
Overlooked SME Deductions Worth Double-Checking
Other deductions SMEs may miss include:
- Home office running expenses (portion of electricity, heating, internet costs).
- Depreciation on business assets like office furniture or computers.
- Motor vehicle expenses, with careful logbook or cents-per-kilometre calculations.
- Business loan interest and bank charges related to business accounts.
- Advertising and marketing expenses, including website advertising and sponsorships related to business promotions.
Brokers can try to encourage SME clients to complete an annual “deduction review” to catch missed opportunities before EOFY.
How Brokers Can Help SME Clients Catch More Deductions
Brokers can play a key advisory role by:
- Educating clients about deductions early, not just at tax time.
- Recommending reliable accounting software that automatically tracks expenses and categorises claims.
- Encouraging quarterly financial health checks, allowing businesses to stay organised year-round.
- Referring clients to trusted tax professionals who can give detailed advice when needed.
Brokers who help clients stay tax-smart can build stronger long-term relationships and add significant value beyond lending solutions.
Conclusion
Small business owners already wear many hats. Keeping track of potential tax deductions shouldn’t be another overwhelming burden.
However, missing out on these claims can potentially reduce profits year after year. Brokers may want to consider helping their SME clients uncover and claim often-overlooked deductions as a strategic service.
As EOFY approaches, now’s the time to encourage clients to review their deductions, maintain better records and get the support they need to keep more of their hard-earned revenue.
Besides maximising tax deductions, consider helping clients access quick, flexible funding with Lumi. Lumi specialises in business loans tailored for Australian SMEs: fast, flexible, transparent and built to support real-world growth.
