Guide to claiming business deductions

When is an expense incurred?

Accruals or cash basis accounting

You can generally claim a deduction for an expense you incur in the everyday running of your business in the year in which you incur it. For example, an expense is incurred when you receive an invoice, even if you haven't actually paid it. This is known as the accruals method of accounting.

However, if you are using the cash (receipts) accounting method, you can claim a deduction in the year in which you pay the expense, rather than in the year you incurred it.

For more information, refer to Taxation Ruling TR 97/7 - Income tax: section 18-1 - meaning of 'incurred' - timing of deductions.

Claiming expenses you pay in advance

There are different rules for expenses you pay in advance (prepaid expenses). A prepaid expense is one you incur now for goods or services you will receive (in whole or in part) in a later income year.

If your aggregated business turnover is less than $2 million, you can use the prepayments concession. This means you can claim a deduction for the total expense you prepaid if you receive the goods or services in full within 12 months. This applies even if the 12-month period extends into the next income year.

If you will not receive the goods or services in full within 12 months, or your aggregated turnover exceeds $2 million, you must apportion the expense across the whole supply or service period.

For more information, refer to Guide to small business entity concessions.

Claiming business deductions - home

Sections within What you can claim and how to claim

• What makes an expense an allowable deduction?
• Expenses you can claim in the year you incur them
• Expenses you can claim over time
• When is an expense incurred?