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Knowing how to save costs is a vital skill for any business owner. This is the same if you have bought into a franchise model. One of the ways a franchise can save money is to deduct its costs. This means their underlying tax bill is lower. However, it is essential to note that not all costs are tax-deductible in New Zealand. This article will outline what franchise costs are tax-deductible and how they can be deducted. 

What Does Deducting Costs Mean?

A deductible cost is an expense that you can subtract from your income on an income statement. This means that your net income figure becomes smaller, thus paying a lower amount in taxes. It is a tactic used by many businesses to pay lower company taxes. However, not all costs are tax-deductible.

What Are Franchise Costs?

Franchise costs are any costs that your franchise incurs. These include:

  • rent;
  • utilities;
  • insurance;
  • cost of goods;
  • wages; and
  • any other expenses.

When these costs are deductible from your gross income, your overall tax bill is lowered.

What Franchise Costs Are Deductible?

It is important to remember that you can only deduct franchise costs that are entirely for business use. For example, if you are using a vehicle for business and personal use, you can only deduct the costs of that vehicle for the time you use it for the business. However, if you deduct an expense that has not been used for a business, you may be liable for tax fraud. 

An excellent way to think about it is to claim any expenses that are a product of any income earned. For example, if you are a fast-food chain restaurant, you can claim an expense for cooking oil, as that oil is used to create income.

If you are a franchisor, you can deduct costs that relate to any income derived from sources such as:

The initial amount you pay for your franchise can also be deducted and claimed as an expense, which the courts affirmed.

You can also claim depreciation expenses. This means that if you have a vehicle, a piece of machinery or any other asset, you can depreciate this over time and claim it as an expense on your balance sheet. This will lower your taxable income. Your initial franchise fee is also considered an asset. However, this does not depreciate, which means you cannot claim any depreciation expense on this.

It is always a good idea to talk to a lawyer or accountant to make sure that you are following all of your tax obligations correctly. 

What Are My Usual Tax Obligations?

Your usual tax obligations are the same as any other business. You must pay goods and services tax (GST) on anything you sell. If your franchisor is outside of New Zealand, then you will have to think about tax obligations on your franchise fees. You will have to withhold tax from your franchisor. This means that when you pay your franchise fees, a portion of this must be kept aside to be paid to the government. The rate that you pay withholding tax is dependent on how much you are paying in franchise fees. 

You must also pay set up PAYE on your employee’s incomes to meet their tax obligations. 

Ensuring that you pay your tax bill on time is vital for your business’ survival as you do not want to incur a high tax deficit with Inland Revenue. This is because it can be hard to pay this off if it is too high. 

Key Takeaways

A great way to save money as a franchisee is to claim expenses. This means you deduct expenses from your income to make your taxable income lower. In turn, your tax bill is reduced. However, there are only certain types of expenses that you can claim. These are expenses that are incurred in the pursuit of deriving income. This means you cannot claim fuel for your car that you use for your personal use. However, if you use the car for work as well, you can claim a percentage of fuel in line with how much the car has been used for your business. It is also important that you know your usual tax obligations to avoid any issues with Inland Revenue. These include your GST and PAYE obligations.

If you need any legal assistance with how to deduct franchise costs, contact LegalVision’s franchise lawyers on 0800 005 570 or fill out the form on this page.

Frequently Asked Questions

Is a cleaning fee tax-deductible?

If it has helped you to derive income, then it is a tax-deductible expense.

Will claiming an expense always make my taxable income lower?

Yes, if the expense is able to be claimed, then you should do it in order to save costs.

Will all assets depreciate?

No, only certain assets will depreciate. This means that you can only claim a depreciation expense on those assets that do depreciate. 

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