If you are a normal salary earner, this blogpost might not be for you, but should you earn any extra income other than a salary, then you might want to read on.During these difficult times of COVID-19 and lockdown regulations, more South Africans are turning to entrepreneurship as a way of making a living. Whether it is hustling by selling masks and hand sanitiser, renting out a property or rendering a service in your personal capacity. Entrepreneurship is an integral part of the South African business culture.

People operating a business in their own name, better known as sole proprietors, often underestimate the tax benefits they can utilize. One of the most misunderstood topics relating to tax is the operating expenses that can be deducted against taxable income earned.

To clarify, this blogpost will focus on tax deductible expenses in relation to sole proprietors as well as individuals who earn income outside of a normal salary.

Tax deductible expenses

SARS describes tax deductible expenses as “expenses incurred in the operation of a business”. Therefor expenses incurred in the production of income are deductible for tax purposes. The following may be expenses you could consider deducting the next time you complete your ITR12:

  1. Day-to-day business expenses

These types of expenses are incurred in the operation of the business and are deductible from taxable income under section 11(a) of the Income Tax Act of South Africa. They include, but are not limited to –

  • Material and equipment costs
  • Employee costs
  • Office rental
  • Office supplies
  • Telephone and internet costs
  • Travel and vehicle maintenance costs
  • Bank fees
  • Utilities
  • Insurance
  • Marketing
  • Cleaning

It is important to note that you, as the taxpayer, will be responsible to keep all supporting documents relating to these expenses, as SARS may require you for proof of expenses incurred, should your assessment be selected for audit.

2. Certain capital expenses

Capital expenses refers to costs incurred for goods or services intended to be used in the long-term by the business, for example:

  • Computers
  • Equipment
  • Machinery

Section 11(e) of the Act, along with interpretation note 47 requires capital expenses to be written off over a period.  For example, a personal computer can be written off over 3 years, and small assets with a cost of R7 000 or less may be written off in the same year.

3. Entertainment expenses

Any expenses incurred while entertaining clients can be deducted as a business expense for tax purposes. This includes meals, drinks, venue hire etc. Something important to remember when claiming entertainment expenses, is that the burden of proof is on the taxpayer to provide SARS with reasonable assurance that the entertainment expenses incurred were for business purposes.

4. Business start-up expenses

This refers specifically to expenses incurred before the business started any form of trade.

Where the lines blur

The expenses deducted for purposes of income tax submission, should relate directly to your business activities and any personal expenses incurred may not be deducted as business expenses.

Let’s say, for example, that you as the taxpayer, operates from a home office. Internet costs, telephone, cleaning, electricity, rent etc. are all expenses which could be for both personal and business use. Expenses like rent, cleaning and electricity should then be apportioned to the business by using the surface of the home office as an indicator. The burden of proof will be on the taxpayer to satisfy the South African Revenue Services that an accurate measurement was used to determine the business part of the expense.

There are some monthly habits that could make it easier for you to identify business expenses when the tax season opens. For instance, keep a separate set of records for business and personal expenses and keep record of all income received and expenses incurred. Also remember to document the method you used to determine which portion of an expense is attributable to the business.

Conclusion

Remember that only expenses related to your business activities, or a portion thereof, can be deducted against income earned for purposes of calculating your income tax liability.  Should you be uncertain whether or not an expense is deductible for tax purposes, please consult with your accountant.

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice.