Suppose you’re starting a new small business, changing the ‘business structure’ (like incorporating it), raising capital (equity), or even trying to take over or defend against one. In that case, you can tax-deduct the professional (legal, accounting etc.) expenses associated with the process. These expenses cannot include asset depreciation or are deductible anywhere else in the Tax Act.
So, what can you immediately claim when starting a business or changing its structure? In summary, small business entities with a turnover of less than $10 million can claim a deduction of operating costs and the capital cost of setting up a business, including the following:
- ‘Due diligence’ costs of legal and accounting advice,
- The expenses incurred in drafting business plans,
- Legal and accounting advice on the proposed business structure,
- The expenses incurred preparing legal documents, usually solicitor and accounting fees,
- The expenses incurred in setting up business systems,
- Interest and other borrowing costs related to the finance,
- ‘Capital costs’ when you raise capital or go into debt (bank fees etc.).
How do you claim a deduction for your business start-up costs?
First, you must meet the non-commercial loss tests, the most common being having an income turnover of more than $20,000. Otherwise, the loss cannot reduce other income earned but must be carried forward until the business can pass one of the tests.
What about tax deductions after the set-up of your business?
After you set up a business, the general rule about tax deductions is that they are only allowable if the expense is related to generating assessable income. With professional costs like legal fees, if they are needed to keep the business generating revenue, then they are deductible. So, advice and legal work on leases, contracts, and employment matters would be deductible, along with any legal or accounting expenses for work required for the business’s legal compliance.
If you are uncertain whether legal fees are deductible in a particular case, you should run it past a lawyer or accountant. If sufficiently connected to making income, the tax deduction may be allowable. In one case, a pub owner whose bouncer was charged with assaulting a customer was allowed to deduct the legal costs of the bouncer’s defence in court because the bouncer was removing the customer while doing his job. Warning, most criminal defence expenses would not be deductible! But here, the bouncer was doing his job, so they were deductible. The cost of civil lawsuits directly connected to your business, like patent or copyright cases, are also deductible.
Legal expenses related to capital assets are not ordinarily tax-deductible. Still, they don’t forget that you can add them to the cost base of an asset to reduce your Capital Gains Tax upon selling the asset. Depreciation of assets is also not deductible.
As always, don’t forget that these expenses can only reduce your taxable income and must be assessed and planned against financial projections. Also, take great care with the dates of expenditure and the appropriate tax year to claim them as deductions.Contact us today to speak to a business lawyer.