New Zealand has one of the highest number of self-employed people in the world, yet most will admit that paying tax is always a challenge.
There are a number of reasons for this, but one of the main obstacles is that personal costs are put through the business because people think these costs might be tax-deductible.
From an accounting perspective they are considered as drawings. This means they are not going to lower your profit for tax purposes.
Paying for stock is tax deductible; paying for the family holiday is not. This can lead to poor cash flow, resulting in a constant struggle with outgoing payments that are not lowering your tax bill. Ensure your accountant is aware of all you spend and ask them to advise you of what is tax-deductible. A lot of business find that come March 31 there is not enough money in the business to pay their tax bill.
Some top tips for your financial year-end:
Collect all debts. You pay tax on all sales made, even those you have not yet been paid for. Ensure all outstanding amounts are paid before financial year-end.
Deplete your stock levels. This is not the time to buy stock, it’s the time to reduce your profit.
Ensure you claim every cost you possibly can.
Try to run your personal affairs separate to your business.
Very important to remember is if something is tax-deductible it’s not free.