If you are running a business in Australia, you can claim a tax deduction for the cost of digital products that are used in running your business. Let’s explore more about tax deductions for digital product expenses.
Understanding Deductions for Digital Product Expenses
- To determine when you are eligible to claim your deductions, it’s essential to consider the type of expense: capital expense or operating expense.
- Your business may qualify to claim an accelerated or immediate deduction for a capital expense using a tax depreciation incentive.
- You are only allowed to claim tax deductions for the portion of your expenses that is related to running your business.
- You need to keep accurate records to prove your business expenses and how you calculated your claim.
What Expenses Can You Claim?
As a business owner, you may be eligible to claim a tax deduction for digital products you use in running your business. There are two main types of expenses you can claim: operating expenses and capital expenses. The type of expense will determine when you can claim the deduction. If an expense is used for both business and personal purposes, you must split it accordingly and only claim the deduction for the business portion. If you find it difficult to categorise what expenses you can claim, you can seek help from a tax return accountant.
Operating Expenses
Operating expenses are the costs associated with the day-to-day operation of your business.
Common examples include:
- Internet service provider fees
- Software subscriptions, such as accounting, cybersecurity, point-of-sale (POS), learning, job, client, or inventory management software
- Website-related costs, including maintenance that preserves its functionality and appearance
- File-sharing services
- Cloud storage
- Lease or rental payments
Most operating expenses can be claimed as a tax deduction in the year they are incurred.
Capital Expenses
Capital expenses are costs related to:
- Purchasing a depreciating asset, including the price paid, as well as transportation and installation costs
- Establishing, replacing, expanding, or improving your business
Common examples include:
- Computers and accessories
- Mobile phones and tablets
- Connectivity boosters
- Cameras
- Point-of-sale (POS) machines
- In-house software
- Costs of acquiring or developing a website
Typically, capital expenses are claimed over time, reflecting the asset’s depreciation (loss in value).
Under the simplified depreciation rules, your business may be eligible to claim an immediate deduction for certain capital expenses.
Software Expenses
You may be able to treat certain software costs as operating expenses in the year they are incurred, such as:
- Software subscription fees.
- The cost of commercial off-the-shelf software that has an effective life of one year or less.
If the software has an effective life longer than one year, you will need to determine whether it qualifies as in-house software.
Calculating Your Claim
When calculating your claim, you need to separate expenses between business and personal use, and only claim a deduction for the business portion.
If you are registered for goods and services tax (GST) and can claim the full GST credit, the GST component of the asset must be excluded from your claim. You can choose accounting services for your business, so you can leave tax affairs to professionals.
Records you need to keep
You must maintain accurate records to support your claims for digital product expenses, including:
- Tax invoices
- Loan or lease agreements
- Details showing how you calculated your claim
To ensure accurate records, you can also seek help from reliable bookkeepers in Melbourne.
Conclusion
Businesses in Australia can benefit from deductions for digital product expenses, helping reduce their taxable income when they claim them correctly. Whether an expense is categorised as a capital expense or an operating expense determines how and when you are allowed to claim it. Consulting with Reliable Melbourne Accountants can simplify the process and help you maximise your eligible deductions.