What you need to know about allowances and deductions
The Practical Tax Loose Leaf Service says even though a business can use allowances and deductions to reduce their taxable income, there's a subtle difference between the two terms that's important.
The Employment Tax Incentive Act can help you:
Here's how allowances differ from deductions
What's an allowance?
The Practical Tax Loose Leaf Service says an allowance is an amount SARS lets you deduct from your income. But it doesn't have to be an expense you've actually incurred. Or it's a deduction you're allowed over a different time period than that of the incurral period.
A simple way to understand this is that SARS lets you convert a monetary value into a deduction, even if you didn't spend that money on something that's immediately deductible.
Here's an example of an allowance:
You spent money (i.e. incur a cost) on computer equipment you need to run your sales department.
If you spent R40 000 on new computers, you can't reduce your taxable income by deducting the full amount. But, youcan claim an allowance over a period of three years. This is called a wear and tear allowance.
Another example of an allowance is the learnership allowance. You pay for staff training within the scope of a traineeship or apprenticeship. Let's say this amount is R5 250 in a tax year.
SARS lets you actually deduct an additional R30 000 (and not just the R5 250) against your income by way of the learnership allowance.
What's a deduction?
A deduction is an amount SARS lets you deduct from your taxable income. This is usually the actual expense you've incurred. You can use the full amount of the deduction to reduce your taxable income in the year you incur it, or over the period it applies to.
Here's an example of a deduction:
You spent money on insurance for your computer equipment (that your business uses) every month.
The incurred insurance expense can be used in the same tax year as a deduction against your income.
Important: An allowance will (if allowed) become a deduction, but a deduction will generally never become an allowance.
Knowing the difference between allowances and deduction will help ensure you don't deduct the wrong expenses or claim them incorrectly.