Running a small to medium business (SME) in South Africa comes with many challenges but also loads of benefits. Last month we gave you a step-by-step guide to bookkeeping and the month before, we spoke about the vital role of financial planning for South African SMEs. This month we’re focusing on tax, more specifically, tax-saving strategies.
With the right knowledge, you can significantly reduce your tax burden, saving your business money that can then be reinvested in growth. This applies whether you are a sole proprietor or a company. Costs that you incur that directly relate to operating your business could be tax-deductible – you will need to talk to your accountant to get a full understanding of what is allowed and what isn’t. This is Part One on how to reduce your taxable income.
1. Keep detailed records of business transactions
Maintaining thorough and accurate records of all business transactions is crucial. This includes keeping receipts, invoices, bank statements, and any other financial documents. Good record-keeping helps you to track your expenses and income accurately, ensuring you can claim all possible deductions and avoid any issues with SARS.
Certain accounting software systems such as Sage or Xero, allow you to upload your receipts directly into the software by taking a photo or email, thereby reducing the need for filing.
2. Understanding tax deductible expenses
Certain business expenses can be deducted from your taxable income, reducing the amount of tax that you owe SARS. It is important to note that these items must be used solely for the business and not your personal use in order to qualify as a tax deduction. According to SARS, tax-deductible business expenses are expenses incurred in the production of income.
For example, let’s say you made R500,000 for the tax year but you spent R70,000 on business expenses. Your total taxable income would then be R500,000 – R70,000 = R430,000 instead of the full R500,000.
The examples below are a brief overview of the types of expenses that could be deductible BUT, and we can’t emphasise this enough, it is important that you speak to your accountant to find out which of these would apply to your business.
Examples of tax-deductible business expenses:
1.Operating expenses
Operating expenses are the day-to-day costs of running your business.
These include:
- Rent – The cost of leasing office or retail space.
- Utilities – Payments for electricity, water and internet services.
- Office Supplies – Expenditures on stationery, printers, and other office necessities.
- Salaries and Wages – Payments to employees, including benefits and bonuses.
- Insurance – Business-related insurance premiums.
2.Marketing and advertising
Money spent on promoting your business can be deducted from your taxable income.
This includes:
- Advertising Costs – Expenditures on online ads, billboards, print media, social media and other advertising channels.
- Marketing Materials – Costs associated with producing flyers, brochures, and business cards.
NB. Marketing costs could be deductible in full or could be seen as capital expenditure so it will be wise to have a chat with your accountant. Billboards are also seen as capital expenditure and are not 100% allowed as a deduction in the year it is incurred.
3.Professional services
Fees paid to professionals for services that help you manage your business can be deducted.
These include:
- Accounting and Bookkeeping – Fees to hire an accounting professional
- Legal Fees – Costs for legal advice, drafting contracts, and other legal services, if not capital in nature.
- Consulting Fees – Expenses for business consultants or advisors.
NB. Special rules apply where the professional is operating as a sole trader – get advice from your accountant
4.Travel and accommodation
Business-related travel expenses are deductible.
Costs such as:
- Transport Costs – Airfare, bus tickets, car rentals, and fuel expenses for business travel.
- Accommodation – Hotel stays during business trips.
- Meals and Entertainment – Costs for meals and entertaining clients or business partners (note that there are specific limits and rules governing these deductions).
5.Vehicle expenses
If you use a vehicle for business purposes, you can deduct expenses related to its operation.
This includes:
- Petrol/Diesel and Oil
- Maintenance and Repairs – Expenditures on servicing and fixing the vehicle.
- Wear & tear – The gradual decrease in the vehicle’s value over time (subject to specific rules and limits).
NB. These deductions will only apply when the business owns the vehicle, as is the case with a delivery vehicle. If you use your personal vehicle in the day-to-day running of your business then special rules apply. Again, it’s best to get advice from your accountant on how to keep accurate records.
6.Wear and tear/Capital allowance
Wear and tear allows you to spread the cost of a significant business asset over its useful life.
This includes:
- Office Equipment – Wear and tear of computers, printers, and furniture.
- Machinery – Wear and tear of manufacturing or production equipment.
- Vehicles – Wear and tear of cars, vans, or trucks used for business.
NB. Certain industries enjoy accelerated wear and tear provisions so speak to a professional to understand the provisions relevant to your business.
7.Training and Development
Investing in your employees’ skills can also provide tax benefits.
This includes:
- Training Courses – Costs for professional development and skills training.
- Educational Materials – Expenditures on books, software, and other learning materials.
Some training could be seen as capital in nature, you can clarify this with your accountant.
8.Home Office Expenses
If you operate your business from home, a portion of your home expenses may be deductible.
This includes:
- Utilities – A portion of your electricity, water, and internet costs.
- Home Office Supplies – Expenditures on office furniture and supplies.
NB. Speak to your accountant as certain rules apply before these expenses become deductible.
9.Bad Debts
If a customer owes you money and you cannot collect it, you may be able to write off the amount as a bad debt. This reduces your taxable income.
NB. Extensive proof may be required before SARS allows this i.e. proof that you tried collecting it.
10.Interest on Business Loans
Interest paid on loans taken out for business purposes is deductible.
This includes:
- Bank Loans – Interest on loans for business expansion or capital purchases.
- Overdrafts – Interest on overdrafts used for business expenses.
NB. To claim these deductions, it’s essential to maintain accurate and detailed records of all your business expenses. Keep receipts, invoices, and bank statements to substantiate your claims. Proper documentation not only helps during tax filing but also in the event of a tax audit.
3. Leveraging Tax Incentives To Your Advantage
Tax credits directly reduce your tax bill and can provide substantial benefits. Some of these incentives can be complex and costly to obtain, but they are worth discussing with your accountant for potential savings.
Key tax credits for South African businesses include:
Research and Development (R&D) Tax Incentive
This tax credit is designed to encourage businesses to invest in innovation. It provides financial support for activities aimed at developing new products, processes, or services, or improving existing ones.
Eligibility: To qualify, your business must undertake activities in the field of natural or applied sciences to create new knowledge or apply existing scientific knowledge in an innovative way. Your application needs to also be approved by the Department of Trade and Industry.
Tax Deduction: Qualifying R&D expenditure is eligible for a 150% tax deduction. For every R1 spent on R&D, you can deduct R1.50 from your taxable income.
Example: If your SME spends R100,000 on R&D, you can deduct R150,000 from your taxable income, significantly reducing your tax liability.
Learn more about the R&D Tax Incentive
Employment Tax Incentive (ETI)
The ETI aims to encourage businesses to hire young workers (aged 18-29) by providing a tax credit for each eligible employee.
Eligibility: Employees must be between 18 and 29 years old + The monthly salary must be between R2,000 and R6,500 + The employee must be a new hire or employed within the qualifying period.
Monthly Credit: The tax credit can be up to R1,000 per month for the first 12 months of employment and R500 per month for the next 12 months.
Example: If you hire a young worker earning R4,000 per month, you can reduce your PAYE liability by R1,000 for the first 12 months and R500 for the next 12 months.
Learn more about the Employment Tax Incentive
Learnership Tax Incentive
This incentive encourages businesses to invest in employee training and development through registered learnership programs.
Eligibility: There must be a formal learnership agreement registered with the relevant Sector Education and Training Authority (SETA). The learnership must also be for at least 12 months.
Allowance: Businesses can claim a tax allowance of R20,000 or R40,000 (depending on the level of education) for each completed learnership agreement. If the learner has a disability, the allowance will then increase.
Example: If your business has 10 employees on learnerships, you could claim a total tax allowance of R400,000, reducing your taxable income significantly.
Learn more about the Learnership Tax Incentive
Energy Efficiency Savings Tax Incentive
This incentive promotes energy efficiency by providing tax benefits for businesses that implement energy-saving measures.
Eligibility: Any business who invests in renewable energy that is new and unused and brought into use for the first time on or after 1 March 2023 and before 1 March 2025.
Qualifying Costs: Costs related to energy-efficient equipment and processes.
Tax Deduction: You can deduct 45 cents for each kilowatt-hour (kWh) of energy saved.
Example: If your business saves 100,000 kWh through energy-efficient practices, you can claim a tax deduction of R45,000.
Learn more about the Energy Efficiency Savings Tax Incentive
To fully benefit from these tax credits, it is best that you consult with a tax professional such as aXia Consulting. We will explain how to keep detailed documentation of all activities, expenses, and savings related to tax incentives. This will make it easier to claim credits and defend them in case of an audit. Your accountant will help you understand the potential tax savings, then you can make more informed decisions about investments and hiring.
This is Part One of our Tax Saving Strategies article. Check back next month for Part Two which will include 5 more ways to save on your tax.
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