One of the best things about being a sole trader is that you have a lot of freedom in how you run your business. This also applies to your tax obligations, which are easier to understand than with other business structures.
But is it true that a sole trader can pay less tax? And how is this possible?
This article will show you some key ways to reduce your taxes as a sole trader, so you can pay as little tax as possible this 2023 fiscal year.
Your tax accountant can help you pay as little tax as possible, so you can keep more of the money you’ve worked hard for where it belongs.Â
What is a “sole trader”?
As a sole trader, you own and run your business on your own. As the owner and manager, you’ll usually trade either under your own name or a business name.
You might be a freelancer or an independent contractor who runs your business out of your home.
Even though a sole trader is usually a one-person business, you can hire employees. But you still have full control over your business and are legally responsible for everything.
When it comes to tax deductions, sole traders are in a good position because they can claim the most direct business expenses. Most, but not all.
Here are some common expenses you can claim, as well as some you might not have known you could.
Getting reimbursed for operating costs as a sole proprietor
Basically, you can claim the majority of the costs you’ve incurred in the process of making money. This includes things like the cost of your computer hardware or software, your equipment, your car, your insurance for sole traders, and even your rent.
When you claim these operating costs as tax deductions, your taxable income is reduced. Because of this, the amount of tax you have to pay goes down.
But this doesn’t mean you should go out and waste money just to get a tax break. Essentially, spending money cuts into your profit. And the less cash you get, the less money you make.
So, if you want to buy something just to save money on taxes, you should think about whether or not you really need it.
Prepaying expenses
There’s no way around the fact that running a business costs money.
But you can pay for some of these costs in advance. For example, you might be able to pay your rent, service contracts, insurance, conference registrations, or subscriptions to professional associations up to a year in advance.
This means that you don’t have to worry about them the next year, and you can use them as a tax deduction for the current year.
Choosing this option means the amount must be more than $1,000. It also doesn’t include salaries, wages, or any costs required by state law.
Buying assets as a sole proprietor
As a sole proprietor, your business is likely to need a number of important assets to keep going. This includes things like vehicles, a laptop or desktop computer, and other tools that your business needs to run.
If your business’s total sales are less than $50,000,000, these assets can be written off immediately by the Australian government. This lets you claim the cost of these assets as a sole trader tax deduction instead of as depreciation costs over the years.
You just have to figure out how much of this asset’s use is for your business. You can then write off this amount as a tax deduction for that year.
Superannuation contributions as a sole trader
Putting money into your super not only helps you save more for retirement, but it’s also a smart way to lower your tax bill.
Sole proprietors can get a tax break for up to $25,000 of their super contributions. You can get up to $30,000 if you’re over 60.
It’s also simple to do. You just put money into your super fund and list it as an expense when it’s time to fill out your tax return. Then, at the end of the year, register with your super fund the amount you want to claim as a deduction. Once this is approved, you can put it against your taxes.
Get in touch with your super fund to get the form that lets you claim a tax deduction for personal contributions.
Write off bad debts.
In global economic uncertainty and the uncertain environment left by COVID-19, businesses all over the world are feeling the pinch of bad debts.
As a sole proprietor, you can take these bad debts off your taxes. You have to keep a record of when the debt is written off, and then you can get a tax break for that year.
But there’s more to this than just waiting too long for payment. You have to be able to show that you have taken the right steps to get the money back. For example, you will need to be able to demonstrate that you have engaged in the following activities:
- Keeping track of every conversation with the debtor
- Sent reminders of due payment
- Proof of what they did to find out their financial situation
A professional recovery service can help with any formal debt recovery proceedings or bad debt collection. After 90 days, if a customer can’t pay back a debt, you might want to use a service like Debt Recoveries Australia.
So, just in case, make sure to keep track of everything you do with your debtors.
If you have the proof you need to show that you have a bad debt, you should be able to write it off on your taxes.
Other tax breaks that sole proprietors can claim
You may be able to make other tax deductions that you didn’t know about that aren’t mentioned above. This can involve deductions such as:
- Advertising is an example of a non-asset business expense.
- Phone and internet bills
- Costs of a home office
- Fixing or maintaining a home (if you conduct business within your home)
- Fees and interest on your accounts at the bank
- Business travel expenses
- Training, education, and membership fees for professionals
- Insurance
- Your accounting fees.
Hiring an expert tax accountant and paying for good advice is not only a tax deduction in and of itself, but it’s likely to lead to even more deductions.
So, when tax time comes around, it’s important to find the right accountant for your needs.
