Small Business Tax Deductions and the $20,000 Instant Asset Write-Off: A Plain-English 2025-26 Guide

You can claim a deduction for most expenses you incur in carrying on your business, as long as they are directly related to earning your assessable income. In plain terms, money you spend to run and grow the business is generally deductible, while money you spend on yourself privately is not.

The ATO applies three golden rules. First, the expense must have been for your business, not for private use. Second, if the expense is for a mix of business and private use, such as a phone or car, you can only claim the business-use portion. Third, you must have records, usually a receipt or invoice, to prove the expense and how you worked out the business portion.

Common deductible operating expenses include staff wages and super, rent for business premises, marketing and advertising, business insurance, accounting and bookkeeping fees, bank fees and interest on business loans, stationery, trading stock, and repairs and maintenance. Most of these are claimed in the year you incur them.

Some costs are treated differently. Capital expenses, such as equipment, tools, vehicles and fit-outs, are generally claimed over time through depreciation, unless an immediate write-off concession like the instant asset write-off applies. Buildings and structural improvements are claimed separately again as capital works.

The instant asset write-off lets an eligible small business immediately deduct the business portion of the cost of an eligible asset, rather than depreciating it over several years. For the 2025-26 income year, the limit is $20,000 and your business must have an aggregated annual turnover of less than $10 million.

To claim it for 2025-26, the asset must cost less than $20,000 and be first used or installed ready for use for a taxable purpose between 1 July 2025 and 30 June 2026. The limit applies to the asset's cost, so an asset priced at exactly $20,000 or more does not qualify for the immediate write-off.

The $20,000 limit applies on a per-asset basis. That means you can write off several assets in the same year, for example a $4,500 laptop, an $8,000 trailer and a $15,000 second-hand van, as long as each individual asset costs less than $20,000. New and second-hand assets can both qualify.

Where a small business has previously written off an asset under the simplified depreciation rules, the first improvement cost for that asset can also be immediately deducted if it was incurred between 1 July 2025 and 30 June 2026 and is less than $20,000.

Important: this limit is set by legislation and has changed several times in recent years. The $20,000 limit for 2025-26 was confirmed through Parliament, but future years may differ, so confirm the current limit and dates on the ATO page before you buy.

If an eligible asset costs $20,000 or more, you don't lose the deduction, you just claim it over time. Under the simplified depreciation rules, these assets are placed in your general small business pool and depreciated at 15% in the first income year and 30% in each income year after that.

There is a useful safety valve. If the balance of your small business pool is less than $20,000 at the end of the income year, you can write off the entire pool balance that year. This stops small leftover balances from being depreciated for years at a time.

To use the simplified depreciation rules, including the instant asset write-off and the pool, you generally need to choose to apply them and meet the small business eligibility tests. Once you opt in, the rules apply to all your eligible assets, not just the ones you pick.

Depreciation rules involve some choices and timing decisions that can affect your tax over multiple years. If you have a larger asset or several to weigh up, it's worth confirming the treatment with the ATO guidance or a registered tax agent before lodging.

Not every purchase qualifies for the instant asset write-off, even if it costs less than $20,000. Some assets are specifically excluded from the simplified depreciation rules, and a few business costs are not deductible at all.

Assets excluded from the simplified depreciation rules (and therefore the instant asset write-off) include the following:

• Assets leased out, or expected to be leased out, for more than 50% of the time on a depreciating asset lease
• Capital works, including buildings and structural improvements (these are claimed under separate capital works rules)
• Horticultural plants, including grapevines
• Software allocated to a software development pool (but not other software)
• Assets used in your research and development activities
• Assets you allocated to a low-value assets pool before using the simplified depreciation rules

Separately, some business expenses are never deductible. These include entertainment expenses in most cases, fines and penalties (such as parking and speeding fines), the private portion of any expense, and amounts where you have not met your PAYG withholding or reporting obligations. Trading stock and the GST you can claim as a credit are also handled under their own rules rather than as ordinary deductions.

If you run some or all of your business from home, you may be able to claim a portion of your home expenses. There are two broad categories: running expenses (the cost of using a room, such as electricity, gas, phone and internet) and occupancy expenses (a share of rent, mortgage interest, council rates and house insurance).

For running expenses, sole traders and partnerships can use the fixed rate method, which lets you claim 67 cents for each hour you operate your business from home. This rate covers electricity and gas, phone and internet usage, and stationery and computer consumables. You can still separately claim the business portion of depreciating assets like a desk or computer. You must keep a record of the actual hours worked from home across the year.

Alternatively, you can use the actual cost method, where you work out the real business portion of each running expense and keep all the bills and receipts to support it. This can give a larger claim but takes more record keeping.

Occupancy expenses are different and stricter. You can generally only claim a portion of rent, mortgage interest, rates and house insurance if part of your home has the character of a place of business, for example a dedicated room used exclusively or almost exclusively for the business and not readily suitable for private use. Be aware that claiming occupancy expenses can affect the main residence capital gains tax exemption when you sell, so get advice before claiming these.

If you use a car for your business, you can claim the running costs, but you must use one of two ATO methods and keep the right records. The choice often comes down to how many business kilometres you travel and how much paperwork you want to keep.

The cents-per-kilometre method uses a set rate for each business kilometre, up to a maximum of 5,000 business kilometres per car per year. For the 2025-26 income year, the rate is 88 cents per kilometre, set by ATO determination TD 2026/1. This single rate already includes running costs and depreciation, so you can't claim those separately. You don't need a formal logbook, but you do need to show how you worked out your business kilometres, for example with diary records.

The logbook method lets you claim the business-use percentage of your actual car costs, including fuel, registration, insurance, servicing and depreciation. You need a valid logbook kept for a continuous 12-week period, plus receipts for your expenses. If your business travel exceeds 5,000 kilometres a year, the logbook method usually gives a larger and more accurate claim.

These rules apply to cars (vehicles designed to carry under one tonne and fewer than nine passengers). Larger vehicles, such as utes and vans above that limit, are claimed under the general business expense rules rather than the car-specific methods.

Beyond deductions, two concessions reduce the actual tax small businesses pay. They apply differently depending on whether you operate as a sole trader, partnership or trust, or through a company.

The small business income tax offset is for unincorporated businesses, that is sole traders, and individuals with a share of net small business income from a partnership or trust. From the 2021-22 income year onwards, the offset is 16% of the income tax payable on your net small business income, capped at $1,000 per person per year. To qualify, your aggregated turnover must be under $5 million. The offset is worked out automatically when you lodge, so you don't claim a set dollar amount yourself.

Companies are taxed differently. A company that is a base rate entity pays a company tax rate of 25%, rather than the standard 30%. To be a base rate entity, the company must have an aggregated turnover under $50 million and have no more than 80% of its assessable income made up of base rate entity passive income (such as interest, dividends and rent).

These thresholds and rates are set in legislation and reviewed periodically. If you're choosing or changing your business structure to access them, confirm the current rules on the ATO site and consider advice from a registered tax agent, because the right structure depends on far more than the headline tax rate.

Good records are what turn a legitimate expense into a deductible one. You generally need to keep your business records, including receipts, invoices and bank statements, for five years from when you prepared or obtained them, or completed the relevant transaction, whichever is later. Records can be paper or digital, as long as they are true copies and easy to access.

GST interacts with your deductions. You must register for GST if your GST turnover (your total business income, not profit) reaches $75,000 or more, and you need to register within 21 days of crossing that threshold. If you're registered for GST, you generally claim deductions exclusive of GST and claim the GST separately as a credit on your activity statement. If you're not registered, you claim the full GST-inclusive cost as a deduction.

Keep business and private money separate where you can, ideally with a dedicated business bank account. It makes apportioning mixed expenses far easier and gives you a clean audit trail if the ATO ever asks how you worked out a claim.

If you use a tax agent, make sure they are registered. You can check any tax or BAS agent for free on the Tax Practitioners Board public register before handing over your information. An accountant's fees for preparing your business tax are themselves deductible.