Small business tax deductions: what you can claim in 2026–27, and how to prove it

Every deduction comes back to one test. The expense must be incurred in earning your business's assessable income, it can't be private or domestic, and it can't be capital (capital items are usually depreciated instead). Then you need the record to prove it. The ATO's own shorthand is three rules: it must be for the business, you can claim only the business part of a mixed expense, and you must have records.

This guide lists the deductions that matter for small businesses in 2026–27, with the condition and the record for each, the timing rules that let you bring deductions forward legally, and the mistakes that cost our clients money before they came to us. It applies to sole traders, partnerships, companies and trusts, with differences flagged where the structure changes the answer.

What can a small business claim as a tax deduction?

Here's the working list. "Small business" for most concessions means aggregated turnover under $10 million, including connected businesses and affiliates.

What you can't claim

• Private and domestic expenses. Groceries, your own clothing, your children's school fees, family holidays.
• Entertainment. Client lunches, staff parties and event tickets are generally not deductible, and GST credits aren't claimable either, unless you pay FBT on them. A sandwich at a working lunch in your own office is a different thing from a restaurant dinner.
• Fines and penalties imposed by law, including speeding fines in a business car and ATO penalties.
• Capital costs like buying a building, the cost of buying a business, or setting up a new structure (some setup costs are deductible for small businesses, see the FAQ).
• Your own drawings as a sole trader or partner.
• Interest charged by the ATO (GIC and SIC) incurred from 1 July 2025.

Key point: A deduction is not free money. At a 25% company tax rate, a $1,000 expense saves $250 of tax. Spending money only to get a deduction leaves you $750 poorer.

How do vehicle deductions work for small business?

Vehicles cause more amended assessments than almost anything else, because the rules depend on your structure.

Sole traders and partnerships of individuals use one of two methods for cars:

1. Cents per kilometre. A set rate per business kilometre, capped at 5,000 business kilometres a year. No receipts needed, but you must be able to show how you worked out the kilometres (a diary is fine). The rate covers everything, including depreciation and fuel. The ATO publishes the rate each year on its car expenses page.
2. Logbook. Keep a logbook for a continuous 12 weeks that represents your usual travel, then claim the business-use percentage of all car costs: fuel, insurance, rego, repairs, interest or lease costs, and depreciation. A logbook lasts five years unless your pattern changes.

Companies and trusts claim the full running costs of a car they own or lease. The private use by you or a staff member is then a fringe benefit, and FBT applies unless an exemption fits (a ute with only minor private use, or an eligible electric car). Our guide to FBT on cars and electric vehicles works through the options.

Utes that carry a tonne or more, and vans designed to carry nine or more passengers, aren't "cars" for these rules. You claim actual costs, apportioned for private use.

The car limit caps the cost you can depreciate for a passenger car. For 2026–27 it's $69,883. A car costing more than that is still usable, but depreciation stops at the limit.

Can I claim home office costs for my business?

Two quite different situations sit under this heading.

You run the business from home, and part of the house is a genuine place of business (a consulting room, a workshop, a hairdressing salon with its own entrance, set aside for business only). You can claim running costs and a share of occupancy costs: rent or mortgage interest, council rates, insurance. The trade-off is that the business part of the home may lose part of the main residence CGT exemption when you sell. Read our main residence exemption guide before you claim occupancy costs.

You just do some business work at home (admin at the kitchen table, a study used for invoicing). Only running costs are claimable: electricity, internet, phone, depreciation of the desk and computer. You can use the ATO's fixed-rate method, which requires a record of every hour worked from home, or the actual-cost method with bills and a usage diary. No occupancy costs, and your main residence exemption is unaffected.

If your business is run through a company or trust, the home office cost belongs to whoever pays it. A company can't claim your home's electricity bill unless it reimburses or pays you under a proper arrangement, and that may raise FBT. It's usually simpler for you to claim the work-from-home running costs personally, if you're an employee of your company, or for the company to pay a commercial rent under a written agreement.

What are the timing rules for deductions?

The year an expense lands in is a choice, more often than people realise. These rules let a small business bring deductions forward legally. Each one applies for 2026–27.

The instant asset write-off and the pool rules are covered in detail in our instant asset write-off guide.

Watch out: Payday Super started on 1 July 2026. Super now has to reach the employee's fund within seven business days of each payday (longer for a new employee or new fund), so the old habit of paying a big quarterly batch in late June to grab the deduction no longer fits. Your super deductions now follow your pay runs. See our Payday Super guide.

The super guarantee charge is now deductible

Under the old quarterly rules, the super guarantee charge was never deductible. For paydays from 1 July 2026, SGC components are deductible. GIC on late SGC and the late payment penalty still aren't. That softens the cost of a mistake but doesn't remove it, because the charge includes an administrative uplift of up to 60% on top of the missed super.

Worked example: a year-end review for a sole trader

Hypothetical, round numbers, 2026–27 resident rates.

Say Mia runs a mobile physio business as a sole trader. Her taxable profit before year-end planning looks like $160,000, which puts her top dollars at 37% plus 2% Medicare levy.

In May 2027 we review her books together and find:

Two of those weren't new spending at all. They were coding and method errors in her records. That's typical. In our experience the biggest wins come from fixing coding and choosing the right method, not from buying things in June.

Mia also qualifies for the small business income tax offset because her turnover is under $5 million: 16% of the income tax on her net small business income, capped at $1,000 a year. It's an offset, not a deduction, and it applies automatically if your return is prepared correctly.

What records does the ATO expect for business deductions?

If you can't prove it, the ATO can disallow it, and add a penalty. You need to keep records for five years from lodging the return (longer for assets you haven't sold yet).

For every expense

• A tax invoice or receipt showing the supplier, date, amount, what was bought, and the GST (for GST credits over $82.50 including GST, you need a tax invoice)
• Proof of payment (bank or card statement)
• For anything mixed business and private, how you worked out the business share

For specific claims

• Vehicles: the logbook (with odometer readings at start and end) or your kilometre diary
• Travel of six nights or more in a row: a travel diary showing what you did each day
• Home-based business: floor area calculations; hours diary if using the fixed rate
• Trading stock: your 30 June stocktake and the valuation method
• Bad debts: the dated written decision to write the debt off, and your collection attempts
• Assets: the purchase invoice and the date it was first used or installed ready for use
• Payments to related parties (family wages, rent from your super fund or family trust): a written agreement and evidence that the amount is commercial

Keep these in Xero, attached to the transaction. When the ATO asks a question, or when you sell the business, attached records save weeks.

Which deductions do small businesses commonly miss?

From our reviews of new clients' prior-year returns, these come up again and again:

1. Last year's accounting and tax agent fees, paid this year.
2. Interest on a loan used for the business but secured against the home. The purpose of the borrowing decides deductibility, and it's frequently missed.
3. Depreciation on assets bought years ago that dropped off the asset register when the bookkeeper changed.
4. The low pool balance write-off. If your small business pool balance falls below $20,000, you can write off the whole lot.
5. Bank, merchant and platform fees, buried in net payouts from Stripe, Square or marketplaces where only the net amount was recorded.
6. Business portion of phone and internet for sole traders.
7. Borrowing costs on a business loan (establishment fees, valuation, mortgage registration), claimed over five years or the loan term if shorter.
8. Workers compensation premiums, sometimes coded as insurance and missed in the year-end accrual.
9. Obsolete stock still on the books at full cost.
10. Bad debts nobody wrote off before 30 June.

Which deductions does the ATO watch closely?

The ATO compares your business's ratios with others in your industry, using its small business benchmarks. Expenses well above the benchmark invite questions. Areas it has repeatedly flagged:

• Private use of business assets, especially cars, boats, and holiday properties owned by companies and trusts.
• Wages to family members that aren't commercial for the work actually done.
• Mixed-purpose travel where a holiday is dressed up as a business trip.
• Home-based business claims that include occupancy costs without a genuine place of business.
• Money taken out of a company and recorded as an expense rather than wages, dividends or a loan. Money a shareholder takes from their company without paying tax on it is the territory of Division 7A.
• Cash businesses reporting income below what their expenses suggest.

If you've received an ATO letter about any of these, our guide to ATO audits explains what to expect.

Does your business structure change what you can deduct?

The list of deductible expenses is mostly the same. Who claims it, and what it saves, changes.

If your profit has grown and you're still a sole trader, a deduction is worth more to you today than it would be in a company, but the overall tax may be lower in a different structure. Our sole trader vs company vs trust guide shows the trade-offs.

How BPAG helps you claim business deductions properly

We start with the books, because that's where deductions are won or lost.

• Coding reviewed as you go. On our plans, your Xero file is kept current and our transaction coding agent suggests account codes and GST treatment for unreconciled lines, then drafts questions for anything unclear. Your client manager checks and approves before anything posts. See our Xero bookkeeping service.
• A year-end planning meeting before 30 June. We model your profit, the timing levers in the table above, and what each one is actually worth. That's part of our tax planning service.
• Travel and vehicles checked. Our travel deductions agent works through whether travel, accommodation and meals are deductible and what records are needed. Your accountant reviews the answer against your diary and receipts.
• Assets handled properly. Our depreciation agent builds the asset schedule, including instant asset write-off and pooling. Your accountant confirms the dates and business-use percentages.

The agents draft. A qualified accountant reviews and signs off every return, and nothing goes to you or the ATO without a person approving it. If your expenses are simple and your books are clean, a good bookkeeper and a once-a-year return may be all you need, and we'll tell you so. For businesses in a specific industry, our pages for trades and construction and professional services cover the deductions specific to those trades.

General information only, current as at 18 October 2026. It is not personal tax, legal or financial product advice and doesn't take your circumstances into account. Talk to us before you act. Where a recommendation needs a licensed financial adviser or a solicitor, we work alongside them.