Anyone who needs TAX / Accounting Advice

[eitai2001]

Hi Silvia.

Independant Contractors are unfortunately out of my focus at varsity. Usually I would say you are allowed to claim back all expenses incurred for business which would be the above (although hardware and software if your own, you would claim wear and tear, not the actual item), but since you are getting paid a "salary" and having "paye" deducted, I'm not quite sure. My gut tells me you would still be able to deduct these expenses but I can't say for certain.

Regards

Itai

[Podosky]

Independent Contractor

Does an Independent Contractor get Substance and Travel Allowance?

[eitai2001]

I'm afraid I can't really help you with Independant contractors ... but I would have two trains of thought:
1) If the contractor is treated as an employee and receives an allowance, he will be taxed upon it and thus will be allowed as a deduction what an employee is allowed.
2) If the contractor is treated as a company and receives an allowance, it will be taxed as an income to the company, and the related expenses will be allowed as a deduction unless specifically excluded in the act.

[Dave A]

Does an Independent Contractor get Substance and Travel Allowance?

From a tax point of view, by my understanding you can claim actual costs incurred in the generation of income.

Allowances are largely for employees, although there are exceptions. For example, if you attend a conference overseas for business purposes you may claim a daily subsistence allowance.

[Ice]

Hi Dave
I need serious help. My husband and I are starting a small business - we have just applied for the company registration number and are still waiting for that. I'm just anxious to make sure I am allocating all our expenses etc correctly and was wondering if you wouldn't mind answering a couple of questions? I would really appreciate. The business will be run from home - we'll be using about 20% of our house for an office and storeroom for products. I need to know if we are paying about R3500 bond on the property each month (only owe about R250 000 on the house which is valued at about R1.5 M) what portion of that can I allocate as a business expense? (i.e from the interest on the bond and can I allocate some of the bond payment towards it? or do I charge a rental? - percentage of the property value?
Second thing I need to know is - we own two cars - one is paid for and the other is on HP. Both cars will be used for business and private use by my husband and I. I need to know if there is a percentage I can allocate towards the vehicle that is paid off and also what amount of the HP plus interest can I allocate as an expense? These vehicles are privately owned - how does that affect things?
I keep reading this term "depreciation" with regards to office equipment etc - would this relate to the vehicles and if so - how? what about computers and the other office equipment?
I also need to know about travel allowances and could it apply to us? and if you keep a travel logbook - do you still keep all petrol slips etc? Jeez thats a lot of questions - I hope you can help.

[Mark Atkinson]

Hi Ice,

Perhaps I can help you.

With regard to expenses, to my knowledge all general expenses in respect of the property you are running the business from can be apportioned to the business according to the floor area of the business in relation to the floor area of the property. For example, your bond, if your office takes up 10 square metres and your property is 50 square metres, you could apportion 10/50 = 20% of your bond to the business.

For expenses such as telephone bills and and travel allowances, where the phones or vehicles are being used for both business and private usage, specific records need to be kept in order to claim the business portion.

This is looking at it from a taxation point of view. It's essentially the same for accounting records when splitting your private and business expenditure. Any expense which you incur for the business can be recorded as an expense in your accounting records.

Regarding your vehicles, if they are privately owned, you wouldn't record them as assets of the business. You can record and claim expenses incurred in the production of income, however, such as petrol. I'm not quite sure about the HP and interest. You might be able to apportion it, but I'm really not 100% sure.

Regarding depreciation: You would be able to record depreciation on any depreciable assets which belong to the business. Thus, if your vehicles remain privately owned, you wouldn't be able to claim depreciation on them. On any office equipment etc belonging to the business, you would be able to set a depreciation policy and claim that percentage each year as an expense. I would recommend, for simplicity's sake, that you take a look at SARS' Wear & Tear policies for various assets and match your depreciation policy to that. This will mean that your depreciation expense and your wear & tear allowance should be the same each year.

As far as travel allowances is concerned: Travel allowance is a deduction in respect of tax. In order to claim a travel allowance you first of all need to be an employee who is given a travel allowance by the business. Secondly, you need to keep accurate records in a logbook as well as any expenses which you incurred (petrol slips). Then, unless it's changed in the last year (I'm not sure), you can deduct the business portion of that travel allowance using SARS' formula.
I think from a business point of view you can expense the portion of running costs of the vehicle which pertains to the business. (You could probably split this using the logbook)

If I'm wrong with anything please somebody correct me. I've kind of hit a blank on my general bookkeeping knowledge, it's shocking! This is what 3rd year accounts does to you!

Hope that at least helps you in some aspects, Ice.

[Dave A]

I think Mark covers many of the points very well - just the handling of vehicles, I guess. And thinking about it, I understand why Mark is struggling for a definitive answer - because there are a few ways to go about this and the best way probably depends on the exact circumstances.

The first year in business often is rather exploratory as there are so many things that are guessed at without much definitive information to help.

My suggestion is:

• Keep a log book for each vehicle so that you can differentiate between business and private milage
• Keep a record (complete with slips) of running costs - fuel, maintenace, licencing
• Keep a copy of your HP/lease agreement handy, and keep track of your instalments

You will now have a clear trace of the detail required for your accountant to finalise your financial records in this regard and advise you as to the best way to manage these going forward.

Practically, this could be done as seperate expense line items in the business's "management accounts" (I like it this way because it is more likely you'll actually keep track of these things). Then when it comes to finalising your accounts with your accountant, these expenses can be reallocated if required.

[Ice]

Tx Dave!! I'm just trying to get everything right from the start and any and all help from yourself and FORUM members will be greatly appreciated. I'm a little confused about the difference between the TRAVEL ALLOWANCE and claiming the expense of petrol as in my mind they conflict with each other?? Also if I buy a computer for instance for the company - can I not just allocate that as an expense straight off?

[Mark Atkinson]

Ice, you need to try and separate expenses in your mind as TAX DEDUCTIONS and EXPENSES. A travel allowance is a deduction in respect of your taxable income. An individual (employee) can claim this deduction if he gets a travel allowance. Because if you think about it, what a travel allowance actually is, is an employer paying/reimbursing and employee for his travel expenses.

The EXPENSE is what the business puts through it's income statement. That would be petrol & maintenance costs, etc.

With regard to expensing a computer straight off, no you can't. A computer falls under the accounting definition of an asset and therefore needs to be recorded as such. The "expense" can be claimed over it's useful life in the form of depreciation. If there's anything I'm sure of, it's that. You definitely can't expense the whole amount straight off.

[Dave A]

Also if I buy a computer for instance for the company - can I not just allocate that as an expense straight off?

If it costs less than R7000.00, you can expense it straight away in terms of the small item write-off allowance. If it costs more than that, you need to capitalise it and depreciate it at the allowed SARS depreciation rate (three years for personal computers and 5 years for mainframes).

[Mark Atkinson]

I wasn't actually aware of the small item write-off allowance. That's useful!

[Dave A]

I wasn't actually aware of the small item write-off allowance.

I'd better expand on the allowance then. There are two things to bear in mind when applying this allowance:

• The item can't be part of a set (basically, you can't break up something into parts to work around the limit). The example generally used is a diningroom set, which you can't break down to the table and each individual chair as it functions as a set.
• It can't be an asset purchased to rent or lease to another party.

Obviously the "set" issue can get interesting when it comes to IT infrastructure.

[Mark Atkinson]

Obviously the "set" issue can get interesting when it comes to IT infrastructure.

I can imagine. I'm sure if the "set" (example a PC including all peripherals) cost less than R7000 then it wouldn't be an issue? If you're buying a supercomputer and a 42" TV to use as a monitor then you might have an issue

[Ice]

Hi again!!!

On the question of depreciation again. If I buy a computer valued at R7500 for example and I pay CASH for it but only relfect a 1/3rd portion of that amount in my books for the first year - how do I enter that into my books cause the full CASH AMOUNT will show as having been paid from my bank account and then the bank figure amount will be incorrect? If the COMPUTER is purchased on terms then how do I reflect this in my books?

[Dave A]

You would create a fixed asset line item on your balance sheet called Computer equipment. (And depending on what accounting software you're using, you could create a sub-account for each computer asset).

You debit the fixed asset account for the full value of the purchase and credit the bank account used to make payment.

Depreciation entries are done separately, normally at the end of financial year.

If the computer is bought on terms, you would add either a current liability (repaid within 12 months) or long term liability account (repayable over more than 12 months). From there you'd debit the fixed asset account and credit the liability account you created. As you make payments, you'd then be debiting the liability account and crediting the bank account used to make payments.

Just to add one other wrinkle, if you rent the equipment or purchase on hire purchase, you'd expense your payments as an item on your income statement as you make payments.