What financial records should a small business keep and why?

Creating a checklist of what you’ll need to have done by 31 March can help you work steadily towards completing tasks on time and avoid last minute panics over things you missed. Many of the tasks can also provide valuable insights into how things are going throughout the year. Accounting software can be a big help here.

Assets: Keep a track of asset purchases, improvements and disposals as you go, so you can quickly calculate depreciation expense claims. This might include repaying some of the tax on depreciation previously claimed if an asset is sold for more than its depreciated (book) value in your accounts.

Debtors and creditors: Keeping track of what you are owed and your upcoming expenses makes it easier to monitor your cash flow. You can chase up overdue accounts to get your money sooner and avoid penalties for bills you haven’t paid on time. It simply means keeping your accounting up-to-date through a “little and often” approach, rather than through massive catch-up sessions a few times a year.

Profit and loss: Keeping track of your income and expenses is not only required for tax records, but also provides an up-to-date picture of how your business is doing. If you allocate amounts to accounting categories, you can easily identify changes from average historic values. Profit and loss statements can also help you determine monthly sales targets and adjust pricing.

Employee wage records: Wage records need to be kept for every employee. They must include things like total earnings and taxable allowances, PAYE deducted, deductions for child support and student loan, KiwiSaver deductions and contributions, and more. 

GST records: If you’re registered for GST, you must keep records of all GST collected through sales and paid out through business-related expenses. Some suppliers may not charge GST, so be sure to check their invoices or receipts before claiming, particularly for overseas goods or online services. Keeping track of GST helps you manage your cash flow and prevent unexpected payments to Inland Revenue.

Stock take: As near to the end of the financial year as you can, identify the stock you have on hand. This lets you revalue stock or identify obsolete or damaged stock to be written off, both of which can affect your tax bill.

To learn more, visit the Inland Revenue website for details on their required record keeping.

What expenses can be tax deductible for a small business?

Claiming an expense means you deduct, (subtract), its cost from your income to reduce the amount of income you have to pay tax on. If you’re registered for GST, you can also claim the GST component of your expenses. You must keep verifiable records of course, for at least seven years, in case your accounts are audited by Inland Revenue.

In general, you can claim any expense that’s required to produce your taxable income. Here are some examples to get you started:

  • Vehicles, tools, equipment or computers: Items that cost more than $500 usually have to be depreciated, (reduced in value), each year, using a generally accepted percentage rate.  You claim the annual depreciation, (drop in value), as an expense each year, not the full purchase price in the initial year.
  • Insurance: If you can prove that the insurance cover is related to earning your taxable income it may be claimable. Examples might include business liability insurance, premises and stock insurance, business vehicle insurance and some types of income protection insurance. 
  • Vehicle expenses and travel: Fuel, servicing, registration, warrant of fitness and parking for business purposes can all be claimed, as can things like airfares and accommodation for business travel.
  • Utilities: Electricity, gas, water, and council rates are all claimable expenses.
  • Interest: Interest on business loans is claimable, unless the loan is for a residential property investment.
  • Website and other advertising: The costs of setting up, hosting and maintaining a website can be claimed, along with other expenses involved in promoting your business. However, you can only claim 50% of business-related entertainment expenses, such as taking a potential customer or existing client to lunch.
  • Home office: If you work from a home office, you can usually claim a percentage of your home operating expenses, such as utilities, internet, home and contents insurance, council rates, and mortgage interest or rent. The percentage is usually based on the floor area of your office compared to the total area of your home. If you don’t have a separate office just for business, you’ll need to also work out the percentage of time the claimed space is used for business vs personal activity.

If you pay for anything that’s used for both business and personal reasons, you can usually make a claim based on the percentage of business use compared to personal. You’ll need to keep supporting evidence though.

To learn more, check out the Inland Revenue website section on types of business expenses.

How to use end-of-year accounting to plan for the year ahead?

All of the annual record-keeping and calculations required for tax purposes provide a great platform from which to review your business performance and plan ahead to achieve your goals. Here are some examples:

  • If you struggled with cash flow at any point, now’s the time to identify how you can avoid a repeat, and to create a new cash flow forecast.
  • If your assets have increased in value, it may be a good time to review your insurance cover, including data protection through something like cyber insurance.
  • If your margins are being squeezed by increasing costs and competitor pricing, consider whether there are any efficiencies you could investigate, such as new technologies, online accounting/business software, or strategic partnerships that would create economies of scale.
  • If your business has grown, it may be time to review its structure for more beneficial compliance or taxation opportunities, such as moving from a sole trader to a limited liability company.

Related Resources