WHAT BUSINESS EXPENSES ARE TAX-DEDUCTIBLE?

The answer sounds straightforward, but the details matter. Some expenses qualify for a full deduction. Others only qualify in part. Some costs must be depreciated over time. Others fail completely because they are private or capital in nature.  Understanding the difference can save your business thousands of dollars and reduce the risk of problems if Inland Revenue reviews your records. 

In this guide, we explain what business expenses are tax-deductible, how the rules work, which expenses businesses commonly claim, and which mistakes you should avoid.

What Does Tax-Deductible Mean?

A tax deduction reduces your taxable income. For example, imagine your business earns $100,000 and incurs $20,000 of deductible expenses. Inland Revenue calculates tax on the remaining $80,000 rather than the full $100,000.

Many people mistakenly think a tax deduction means the government pays the expense. That is not how it works. Instead, a deduction reduces the income subject to tax. The actual tax benefit depends on your tax rate. If you spend $1,000 on a deductible business expense and your effective tax rate is 28%, the deduction might reduce your tax bill by approximately $280. That still leaves you out of pocket by $720, which highlights an important principle:

Never spend money solely to get a tax deduction. Always make sure the expense serves a genuine business purpose.

For a more lengthy discussion on what tax-deductible means, please see this article.

The Golden Rule for Tax Deductions

Before claiming anything, ask one simple question:

Did I incur this expense while earning taxable business income?

If the answer is yes, the expense may qualify. If the expense relates partly to business and partly to private use, you usually need to apportion it between the two. Section DA 1 of the Income Tax Act 2007 contains the general deduction rule. The legislation allows deductions for expenditure incurred in deriving taxable income or carrying on a business for that purpose.

However, three important limitations often apply:

• Private expenses are generally not deductible
• Capital expenses are generally not immediately deductible
• Some expenses have specific rules that override the general deduction rule

Understanding these limitations helps business owners avoid costly mistakes.

Accounting and Professional Fees

Most businesses incur professional fees throughout the year.

Examples include:

• Accounting fees
• Tax return preparation fees
• Bookkeeping costs
• Payroll services
• Business advisory services
• Tax planning consultations

These expenses generally qualify for deduction because they directly support the operation of the business. Professional advice often saves far more than it costs. A qualified accountant can identify deductions, improve recordkeeping, and help you stay compliant with Inland Revenue requirements.

Useful resource:

• https://www.ird.govt.nz/business-expenses

ACC Levies

Many self-employed people and business owners receive annual ACC invoices. In most cases, ACC levies relating to business income are deductible.

Examples include:

• Sole trader ACC invoices
• Shareholder-employee ACC invoices
• Employer ACC levies

Because these charges arise directly from earning business income, businesses can generally claim them as a deduction. Keep all ACC invoices and payment records with your accounting files.

Bank Charges and Merchant Fees

Financial institutions charge businesses for various services.

Common deductible expenses include:

• Bank account fees
• Merchant terminal fees
• Credit card processing fees
• International transaction charges
• Business loan establishment fees (subject to specific rules)

These costs arise from operating the business and typically qualify for deduction. Even small bank fees add up over a year, so ensure your bookkeeping captures them correctly.

Contractor Costs and Subcontractor Payments

Many businesses engage independent contractors rather than employees.

Examples include:

• Tradespeople
• Freelance designers
• Marketing consultants
• Virtual assistants
• IT support providers
• Property maintenance contractors

Payments to contractors usually qualify as deductible business expenses provided they relate to income-earning activities.  Maintain invoices and agreements that clearly demonstrate the business purpose of the work.

Rent, Lease, and Occupancy Costs

Businesses often need premises from which to operate.

Deductible costs may include:

• Office rent
• Commercial lease payments
• Shared workspace memberships
• Warehouse rental costs
• Storage unit fees
• Workshop leases

The deduction generally applies because these costs relate directly to operating the business. Businesses that lease equipment may also claim lease expenses depending on the arrangement.

Home Office Expenses

Many New Zealand business owners work from home. If you use part of your home regularly and exclusively for business purposes, you may claim a portion of certain household costs.

Depending on your circumstances, claimable expenses can include:

• Mortgage interest
• Rent
• Rates
• House insurance
• Power
• Internet
• Repairs and maintenance

The business-use percentage determines the amount you can claim.

Inland Revenue provides guidance on home office calculations.

Useful resource:

• IRD Home Office Expenses Guide

Many business owners overlook this deduction and miss out unnecessarily.

Motor Vehicle Expenses

Motor vehicles represent one of the largest expense categories for many small businesses.

Potential deductions include:

• Fuel
• Registration
• Warrant of Fitness
• Repairs
• Servicing
• Insurance
• Parking
• Road user charges
• Lease payments
• Depreciation

The critical issue involves separating private use from business use. If you use a vehicle for both purposes, you generally need evidence supporting the business percentage claimed. A logbook often provides the strongest evidence. Keeping accurate records reduces disputes and supports your deductions if Inland Revenue asks questions later.

Travel Expenses

Travel often forms an essential part of business operations.

Deductible travel expenses may include:

• Airfares
• Taxis
• Rental cars
• Accommodation
• Mileage
• Parking
• Public transport

However, Inland Revenue examines travel closely. A business owner who combines a conference with a family holiday may need to split costs between business and private use. Documentation matters. Keep itineraries, receipts, conference registrations, and meeting records.

Useful resource:

• https://www.businessevents.newzealand.com

Telephone and Internet Costs

Modern businesses depend heavily on communication technology.

Potential deductions include:

• Mobile phone plans
• Internet connections
• VoIP services
• Business messaging platforms
• Video conferencing subscriptions

Where personal use exists, you must estimate a reasonable business percentage.

For example, a sole trader who uses a mobile phone 70% for business may claim approximately 70% of the related costs.

Reasonable records support your position.

Software and Technology Expenses

Cloud software has become a standard business cost.

Common deductible software expenses include:

• Xero
• MYOB
• Microsoft 365
• Customer relationship management systems
• Project management software
• Cybersecurity subscriptions
• Website hosting fees
• Domain registrations

These expenses generally qualify because they assist with generating business income. Many software products operate on monthly subscriptions, making them straightforward business deductions. 

Just be aware that there are exceptions e.g. a first-time domain name registration is not tax-deductible, but a renewal is. A website build is generally a capital cost that can be depreciated over time but generally will exceed the cost threshold to be claimed in full when built. A software install and setup has to be treated similarly, and there are limits to what can be claimed in one financial year. So in these situations, be sure to get professional advice. Be careful about asking AI about this too. It hallucinates sometimes.

Useful resources:

• https://www.xero.com/nz/
• https://www.microsoft.com/en-nz/microsoft-365/business

Stationery and Office Supplies

Traditional office expenses remain deductible despite the shift toward digital operations.

Examples include:

• Paper
• Printer toner
• Pens
• Folders
• Postage
• Courier costs
• Notebooks
• Filing systems

Although individually small, these costs can accumulate significantly during the year.

Good bookkeeping ensures you capture every legitimate deduction.

Advertising and Marketing Costs

Businesses need customers, and customers need to know the business exists.  Marketing expenses generally qualify for deduction.

Examples include:

• Google advertising
• Facebook advertising
• Website development
• Search engine optimisation
• Graphic design
• Business cards
• Printed brochures
• Sponsorships with a genuine promotional purpose

Advertising expenditure frequently provides one of the clearest examples of costs incurred to earn income.

Useful resources:

• https://ads.google.com
• https://www.business.govt.nz

Insurance Premiums

Many business insurance policies qualify as deductible expenses.

Examples include:

• Business asset insurance
• Commercial vehicle insurance
• Professional indemnity insurance
• Public liability insurance
• Cyber insurance
• Business interruption insurance

However, not every insurance premium qualifies. Personal life insurance and certain personal income protection policies may receive different tax treatment. Always review the specific circumstances.

Depreciation on Business Assets

Not every purchase qualifies for an immediate deduction. If you buy an asset expected to last longer than one year, Inland Revenue may require you to depreciate it instead.

Examples include:

• Computers
• Office furniture
• Machinery
• Tools
• Commercial vehicles
• Business equipment

Depreciation spreads the deduction across several years rather than allowing a single deduction upfront. The applicable rate depends on the asset type.

Useful resource:

• IRD Depreciation Rate Finder

Entertainment Expenses

Entertainment often catches business owners by surprise. Many entertainment expenses only qualify for a 50% deduction.

Examples may include:

• Business meals
• Corporate hospitality
• Staff social functions
• Sporting event tickets

Some entertainment costs qualify for full deductibility, while others attract restrictions. Because the rules become complex quickly, discuss significant entertainment expenditure with your accountant before claiming.

Legal Fees

Legal fees can qualify as tax-deductible, but only in certain circumstances.

Legal costs often qualify where they relate to:

• Debt recovery
• Lease matters
• Employment issues
• Contract disputes
• Day-to-day business operations

However, legal fees associated with purchasing major assets or restructuring a business may constitute capital expenditure. The purpose of the legal work usually determines the outcome.

Purchases of Trading Stock and Materials

Businesses that sell goods or manufacture products regularly purchase stock and materials.

Examples include:

• Retail inventory
• Building materials
• Construction supplies
• Products for resale
• Raw manufacturing inputs

These purchases generally qualify because they directly contribute to earning income. Accurate stock records remain essential for year-end tax reporting.

Expenses That Are Usually Not Deductible

Understanding what you cannot claim matters just as much as knowing what you can claim.

Generally, non-deductible expenses include:

• Private living costs
• Family groceries
• Personal clothing
• School fees
• Fines and penalties
• Personal holidays
• Capital improvements
• Private medical expenses

A business bank account does not automatically make an expense deductible. Inland Revenue focuses on the purpose of the expenditure rather than the bank account used.

Recordkeeping: The Key to Protecting Your Deductions

Even the most legitimate deduction can fail if you cannot prove it.

Maintain:

• Tax invoices
• Receipts
• Contracts
• Bank records
• Logbooks
• Travel documentation
• Digital copies of important paperwork

Cloud accounting systems make record retention much easier than in the past. Good records support your deductions and reduce stress during tax time.

Common Mistakes Business Owners Make

Many businesses lose deductions through simple errors.

The most common mistakes include:

Mixing Private and Business Spending

Separate bank accounts simplify bookkeeping and strengthen evidence.

Losing Receipts

Digital copies often provide sufficient evidence.

Claiming 100% Business Use When Private Use Exists

Be realistic and maintain supporting records.

Treating Capital Purchases as Immediate Deductions

Large assets often require depreciation treatment.

Ignoring Small Expenses

Minor expenses accumulate throughout the year and may produce meaningful tax savings.

Final Thoughts: What Business Expenses Are Tax-Deductible?

So, what business expenses are tax-deductible?

In general, New Zealand businesses can claim expenses incurred while earning taxable income. Common deductions include accounting fees, ACC levies, contractor costs, rent, home office expenses, motor vehicle costs, travel, software subscriptions, telephone expenses, insurance, office supplies, and many other ordinary business expenses.

However, every expense requires analysis. The business purpose, private use element, and capital nature of the expenditure can all affect deductibility.

Remember these key principles:

• Claim expenses that relate directly to earning income.
• Keep detailed records.
• Separate private spending from business spending.
• Apportion mixed-use expenses properly.
• Seek professional advice when uncertainty exists.

Using these principles helps maximise legitimate deductions while reducing compliance risks.

Need Help Identifying Your Tax Deductions?

At EpsomTax.com, we help business owners, property investors, landlords, sole traders, companies, trusts, and LTCs understand exactly what business expenses are tax-deductible and how to claim them correctly. 

If you’re unsure whether an expense qualifies, or you want to maximise your deductions while staying compliant with Inland Revenue requirements, contact our team today. We can also help you identify financial blind spots that might be holding your business back. Book a consultation with EpsomTax.com and let us help you keep more of what you earn.