Can a sole proprietor deduct accounting and tax-practitioner fees?

Direct answer

A sole proprietor should not claim every fee paid to an accountant, bookkeeper or tax practitioner as a business expense. The invoice needs to be analysed according to the work performed. Bookkeeping, management accounts, payroll administration, trade records and other services connected to the income-producing business may need different treatment from private tax-return work, estate planning, an investment portfolio, personal financial planning or a capital transaction.

SARS’s ITR12 business information includes an accounting-fees category. This is a reporting category, not an answer to what amount qualifies. Because the owner and sole proprietorship are not separate taxpayers, one invoice can easily include both the business and the owner’s private affairs.

What this means in practice

Ask for an itemised engagement letter and invoice. It should identify the service, period, person or business served, hours or fee basis, and output. An invoice that simply says “annual accounting and tax services” is harder to support than one showing bookkeeping for the trade, financial statements, VAT or payroll work, business tax calculations, and a separately priced personal return.

Review the purpose of each service. Work on day-to-day accounting records, business cash flow, invoicing, debtor control, trading books and tax compliance connected to the business may have a direct trade link. Work on a personal residence, will, divorce, estate, investment portfolio, retirement planning or private tax position should not be placed into the business category simply because the same adviser did the work.

Capital transactions need extra care. Fees related to buying or selling a business, acquiring premises, restructuring ownership, financing a major asset or negotiating a long-term transaction can require treatment different from an ordinary operating cost. Do not claim those fees automatically as accounting expenses just because the adviser is an accountant. Keep the relevant sale, purchase, financing or restructuring documents with the invoice.

If a practitioner prepares the individual ITR12 containing both salary or investment income and a sole-proprietor schedule, do not assume the whole fee belongs to the trade. Obtain an allocation that reflects the actual services. A reasonable, documented allocation from the practitioner is stronger than a percentage invented by the taxpayer after payment.

Step-by-step

1. Obtain an itemised invoice.

Ask the adviser to separate bookkeeping, business accounts, business tax work, private return preparation, personal planning and transaction work where possible.

1. Match each item to its purpose.

Record what trade activity the service supported and retain the engagement letter, deliverables and correspondence.

1. Identify private and capital components.

Exclude private household, estate, personal investment and unrelated owner work. Flag acquisitions, disposals and restructures for advice.

1. Reconcile the payment.

Match the invoice to proof of payment and the business ledger. Record credits, refunds and payments by a third party separately.

1. Review the ITR12 entry.

Use the current business information only for the supportable trade amount. Keep a workpaper explaining the allocation.

1. Retain the records.

Preserve the invoice, engagement, workpapers, submitted return and assessment. SARS directs taxpayers to retain return records for at least five years.

Documents and records to keep

• Engagement letter, scope of work and itemised invoice.
• Bookkeeping reports, accounts, tax schedules and deliverables.
• Proof of payment, credit notes and correspondence on any allocation.
• Transaction documents for business purchases, sales or finance work.
• A schedule separating trade, private and capital components.

Important limits and exceptions

This guide does not determine the deductibility of a particular professional fee. A service can serve several purposes, and the treatment can depend on what was actually done rather than the professional title or invoice heading. Fees paid by a company, partnership, employer or family member should not be entered in the individual business schedule without checking who incurred the cost.

Do not call a mixed personal ITR12 fee wholly business-related without evidence. Do not rely on a practitioner’s marketing description in place of an itemised scope. If the fee concerns an objection, voluntary disclosure, litigation, a major acquisition or cross-border matters, seek technical advice before submitting the return.

When to get tailored advice

Obtain advice where the invoice is large, covers multiple entities, has private and trade elements, or relates to an acquisition, disposal, dispute or restructuring. TaxProof can produce the allocation schedule and evidence pack for review.

Related TaxProof guides

• Can a sole proprietor deduct legal costs for the business?
• What business expenses can a sole proprietor claim?

Sources

• SARS, Individual Deductions
• SARS, Sole Proprietorship