Most jurisdictions tax businesses on their income. Generally, this tax is imposed at a specific rate or range of rates on taxable income as defined within the system. Some systems have a separate body of law or separate provisions relating to business taxation. In such cases, the law may apply only to entities and not to individuals operating a trade. Such laws may differentiate between broad types of income earned by businesses and tax such types of income differently. Generally, however, most such systems tax all income of a business in the same manner.
Taxation law is a complex and in-depth area of concern for the small business owner. With potential pecuniary and criminal consequences, it is of paramount importance to ensure as a business owner, you are familiar with the tax consequences in your jurisdictions, and the ways in which you can minimise your liability. Whilst one of the most legally important things to understand as a small business owner, taxation law also provides an excellent opportunity for saving money and increasing profitability within a small business environment. In this article, we will look at some of the main and most common tax implications of running a small business, and some of the most effective ways of ensuring you pay less tax through your small business operation.
Tax regimes vary from jurisdiction to jurisdiction, and the implications of running a small business also vary, both in terms of the legal and financial requirements. Having said that, there are a number of common elements that transcend jurisdiction and appear in numerous guises across various systems that can be of use to the small business owner. One of the first things to consider as a small business owner is to establish a limited liability company. The primary reason for this is that limited liability companies usually provide a more relaxed tax regime as compared to income tax liability. A sole proprietor operating out-with the parameters of a corporate entity is liable to account for profits as income, which can lead to a greater tax liability and potential individual state contributions. As a corporate entity, the owner can pay himself via share dividends, which carry a lower tax liability and thus minimising his overall liability to tax. This is significantly better than paying oneself a wage, which bears the tax liability from both ends, i.e. the company is liable to taxation as is the employee.
Another essential for the small business owner is what is known as capital allowance. By means of capital allowance, business owners can offset the acquisition cost of assets on a graduated scale in accordance with the specific principles of the regime in question. This is in effect a deductible expense, which ultimately minimises yearly tax liability. There is a particular benefit in that many regimes allow an accelerated relief for business assets. This can be exploited to an extent by acquiring assets through the business, for example a car, which can also be used for personal purposes. Rather than buying a car from personal income, buying it through the company allows you to offset the amount of the expense quickly against your business profits, which ultimately reduce your liability to tax.
Before embarking on any tax reducing strategies, it is important to ensure you are acquainted with the specific laws of your jurisdiction to avoid running into trouble with the authorities. In some of Europe, for example, there is a requirement to declare any specific tax minimising strategies to the government to allow for rectification of loopholes. It is important to ensure you are acquainted with the specific laws to avoid potential criminal liability as a consequence of ignorance. By familiarising yourself with the laws in your jurisdiction, you can avoid the potential pitfalls and create a tax planning strategy that provides the most cost effective solution for you and your small business.
Donations to charity are tax deductible expenses. These donations can reduce your taxable income and lower your tax bill. Not everyone will be able to deduct their charitable contributions, however. You will need to itemize your tax deductions in order to claim any charity. You need to claim your tax deduction on the correct form.
If you plan to give to charity, consider donating before the year ends. That way you can claim your contribution as an itemized deduction. This includes donations you charge to a credit card although you must give to a qualified charity to claim a tax deduction. Use your relevant Government tax site to see if an organization is qualified.
Make sure to save your receipts. You must have a written record for all donations of money in order to claim a deduction. Special rules apply to several types of property, including clothing or household items, cars and boats.
In the United States donating your car to charity can result in significant tax savings if you include it in your charitable contribution deduction. However, doing a little planning will ensure that you maximize the tax savings of your donation. The Internal Revenue Service (IRS) requires you to calculate your deduction in one of two ways, depending on how the charity uses your donation. Deductions for cars the charity sells are limited to the sales price. In all other cases, you can use the car's fair market value.
Use the price the charity obtains for your car in a sale as the amount of your deduction. For example, if the charity sells the car at auction for $3,000, your deduction is limited to $3,000, even if the fair market value is $4,500. However, if the charity sells the car at a discount to a needy individual or keeps the car for its own internal use, then you can claim a deduction for its fair market value.
The IRS suggests that you use a reputable used-car price guide to calculate your deduction when using fair market value. For example, go to your local library and obtain a recent copy of the Kelley Blue Book. Search the private party prices for your vehicle based on its make, model and overall condition. This type of search can be done on the Internet as well.
Report the amount of your deduction on line 17 of Schedule A. Since you can only claim a deduction for your car donation if you itemize, the total of all your eligible expenses on Schedule A must exceed the standard deduction amount for your filing status.
Your recordkeeping and filing requirements depend on the amount of your claimed deduction.
If you claim a deduction of at least $250 but not more than $500 for the car donation, you will need a written acknowledgment from the charity. The acknowledgment must be obtained by the earlier of the date you file your return for the year of the donation, or the due date of the return with extensions. The acknowledgment must include the following:
- A detailed description of the car.
- A statement as to whether or not the charity provided any goods or services in return for the car other than intangible religious benefits and, if so, a description and good faith estimate of the value of the goods and services.
- If the charity provides solely intangible religious benefits, a statement to that effect.
Do not attach the written acknowledgment to your return. Instead, retain it with your records to substantiate your donation.
If you claim a deduction of more than $500 but not more than $5000 for the car donation, the written acknowledgment from the charity must be timely, must be attached to your return and must include all of the information listed above, plus the following additional information:
- Your name and taxpayer identification number.
- The vehicle identification number.
- The date of the contribution.
- A certification that the car was sold by the charity in an arm’s length transaction between unrelated parties.
- The date the car was sold by the charity.
- The gross proceeds of the sale.
- A statement that the deductible amount may not exceed the amount of such gross proceeds.
For this acknowledgement to be considered timely, generally you must receive it within 30 days of the sale of the car. In lieu of a written acknowledgment, the charity may provide you a completed Form 1098-C (PDF), Contributions of Motor Vehicles, Boats, and Airplanes that contains the same information.
You must also complete Section A of Form 8283 (PDF), Noncash Charitable Contributions, and attach both the written acknowledgment and the form to your return.
If you claim a deduction of more than $5,000 for the car donation, you must obtain a written acknowledgment with the information described above. You must also complete Section B of Form 8283, and attach both the written acknowledgment and the form to your return. An appraisal is not required if your deduction is limited to the gross proceeds of the sale.
Charitable contributions are deductible only if you itemize deductions on Form 1040, Schedule A (PDF).
To be deductible, charitable contributions must be made to qualified organizations. Payments to individuals are never deductible. See Publication 526, Charitable Contributions. To determine if the organization that you have contributed to qualifies as a charitable organization for income tax deductions, review Exempt Organizations Select Check on the IRS.gov website.
If your contribution entitles you to merchandise, goods, or services, including admission to a charity ball, banquet, theatrical performance, or sporting event, you can deduct only the amount that exceeds the fair market value of the benefit received.
For a contribution of cash, check, or other monetary gift (regardless of amount), you must maintain as a record of the contribution a bank record or a written communication from the qualified organization containing the name of the organization, the date of the contribution, and the amount of the contribution. In addition to deducting your cash contributions, you generally can deduct the fair market value of any other property you donate to qualified organizations. See Publication 561, Determining the Value of Donated Property. For any contribution of $250 or more (including contributions of cash or property), you must obtain and keep in your records a contemporaneous written acknowledgment from the qualified organization indicating the amount of the cash and a description of any property contributed. The acknowledgment must say whether the organization provided any goods or services in exchange for the gift and, if so, must provide a description and a good faith estimate of the value of those goods or services. One document from the qualified organization may satisfy both the written communication requirement for monetary gifts and the contemporaneous written acknowledgment requirement for all contributions of $250 or more.
You must fill out Form 8283 (PDF), and attach it to your return, if your deduction for a noncash contribution is more than $500. If you claim a deduction for a contribution of noncash property worth $5,000 or less, you must fill out Form 8283, Section A. If you claim a deduction for a contribution of noncash property worth more than $5,000, you will need a qualified appraisal of the noncash property and must fill out Form 8283, Section B. If you claim a deduction for a contribution of noncash property worth more than $500,000, you also will need to attach the qualified appraisal to your return.
Many of us need information when preparing our federal tax returns. We have questions about dependents, which forms to use and how to claim a credit.
Here are the best ways to get free help from the IRS:
- Visit the IRS on the Web. The IRS.gov website is your one-stop tax shop. Start at ‘1040 Central.’ Before you go anywhere else, look here for tips and information that will help you file your federal tax return. This page has links to information about filing options, the latest news and frequently asked questions. You will also find links to a number of online tools like the Interactive Tax Assistant and the IRS Tax Map for answers to your tax questions. Use ’Where’s My Refund?’ to check on your refund or use the EITC Assistant to see if you’re eligible for the Earned Income Tax Credit. You can also get all the forms and publications you need 24x7.
- Use IRS Free File to do your taxes. Everyone can use IRS Free File to prepare and electronically file their federal tax return for free. IRS Free File is available exclusively on IRS.gov. The fastest way to get your refund is to combine e-file with direct deposit. If you made $58,000 or less, you can use Free File tax software to e-file your tax return. The software is easy to use and will guide you through the steps of filing your taxes. If your income is more than $58,000 and you’re comfortable doing your own taxes, you can use Free File Fillable Forms. This program is the electronic version of IRS paper forms.
- Get tax help in your community. The Volunteer Income Tax Assistance program helps people who make $52,000 or less prepare and file their tax returns for free. The Tax Counseling for the Elderly program offers help mainly to people 60 or older. AARP is part of the TCE program and helps taxpayers with low-to-moderate incomes. VITA sites are located in neighborhoods all over the USA. Visit IRS.gov and enter ‘VITA’ in the search box. Then click ‘Free Tax Return Preparation for You’ to locate a VITA or TCE site near you.
There are a few tax rules that affect everyone who files a federal income tax return. This includes the rules for dependents and exemptions. The IRS has seven facts on these rules to help you file your taxes.
- Exemptions cut income. There are two types of exemptions: personal exemptions and exemptions for dependents. You can usually deduct $3,900 for each exemption you claim on your tax return.
- Personal exemptions. You can usually claim an exemption for yourself. If you’re married and file a joint return you can also claim one for your spouse. If you file a separate return, you can claim an exemption for your spouse only if your spouse had no gross income, is not filing a return, and was not the dependent of another taxpayer.
- Exemptions for dependents. You can usually claim an exemption for each of your dependents. A dependent is either your child or a relative that meets certain tests. You can’t claim your spouse as a dependent. You must list the Social Security number of each dependent you claim. See IRS Publication 501, Exemptions, Standard Deduction, and Filing Information, for rules that apply to people who don’t have an SSN.
- Some people don’t qualify. You generally may not claim married persons as dependents if they file a joint return with their spouse. There are some exceptions to this rule.
- Dependents may have to file. People that you can claim as your dependent may have to file their own federal tax return. This depends on many things, including the amount of their income, their marital status and if they owe certain taxes.
- No exemption on dependent’s return. If you can claim a person as a dependent, that person can’t claim a personal exemption on his or her own tax return. This is true even if you don’t actually claim that person as a dependent on your tax return. The rule applies because you have to right to claim that person.
- Exemption phase-out. The $3,900 per exemption is subject to income limits. This rule may reduce or eliminate the amount depending on your income. See Publication 501 for details.
Tax Saving U.K.
- Check your tax code each year (the numbers and letters on your payslip). If you're on the wrong code, you may be paying too much tax. For more details, see Tax codes explained, or use the Which? tax calculator to find out how much tax you should be paying.
- Remember that capital gains under £11,000 are tax-free. Married couples and civil partners who own assets jointly can claim a double allowance of £22,000. CGT is charged at 18% if you are a standard rate taxpayer, and 28% if you pay tax at a higher rate. The tax-free allowance is £10,900 per person.
- Don’t miss the 31 October deadline if you want to make a paper tax return. You can do your tax online up to 31 January, but paper tax returns need to be in three months earlier than online tax returns to avoid a £100 fine.
- If you are a landlord or run your own business, take advantage of the annual investment allowance (AIA) to claim for capital expenditure on items such as tools and computers. You can claim relief on up to £500,000 a year.
- If you are self-employed, don’t forget to claim all your tax-deductible expenses, including cash expenditure where eligible.
- If you are self employed, you can claim the running costs of a car, but not the cost of buying one. If you use the same car privately, you can claim a proportion of the total costs. See our page on tax allowances for the self-employed for more.
- If you are setting up as self employed, you may be able to improve your cashflow by choosing an accounting year that ends early in the tax year. This maximises the delay between earning your profits and your final tax demand.
- If you are self employed, you can carry forward losses from one year and offset them against profits from the next.
- If you are self-employed and expect to earn less in one year than you did the year before, apply to reduce any payments on account that HMRC ask you to make.
Tax Saving Australia
Under Australia’s self-assessment tax system, you are responsible for declaring all your assessable income such as Wages & Salary, Business Income, Investments including dividends, distributions, rents, interest etc.
Claims you make in your tax return are usually accepted without adjustment and an assessment notice is issued. However, under the laws of self-assessment, the Tax Office is able to review your claims and increase or decrease the amount of tax payable for up to four years after you lodge your return. In some circumstances, anti-avoidance provisions of the law may extend the period of review up to six years.
You are responsible for the correctness of your tax return, and are encouraged to investigate claims of tax benefits before claiming a tax deduction.
The mission of gathering all work related deductions may appear intimidating especially given the need to collate all the required tax invoices and receipts for any significant claims. This task can be made easy by understanding what work-related expenses are potentially deductible and can save you considerable cost. One of the easiest and most practical ways is to pay all your expenses through a single bank account or credit card so you can easily locate the relevant costs and any associated receipts.
In the event you don’t have the necessary receipts you can still claim up to $300 of work-related expenses provided the claims relate to outgoings you have incurred in your job or business.
Some of the common work-related expenses that are allowable include uniforms, Laundry, business mobile & telephone costs, subscriptions and union fees.
Self-education expenses are also deductible in certain circumstances where the study is directly related to either maintaining or improving your current occupational skills or it is likely to increase your income from your current employment. If the study is to obtain new qualifications in a different field the expenses will not be allowable.
Many people get jumbled between Work related Expenses and Tax Offsets. Expenses or Work Related Deductions reduce your Assessable income whereas Tax offsets directly reduce your payable tax and can add up to a sizeable amount. So it pays to know all the offsets you are entitled too. Eligibility for offsets will generally depend on your income level, family circumstances and satisfying specific conditions for each rebate.
Most Common examples of tax offsets include the dependent spouse rebate, low-income rebate, mature aged worker rebate, the senior Australian tax offset, the medical expenses offset, the private health insurance offset and the offset for superannuation contributions made on behalf of a low income spouse.
Additionally, there is a 25 per cent entrepreneur’s tax offset if a sole-trader has elected to enter the small business entity system.
An Education Tax Offset is available for families who receive Family Tax Benefit Part A for 50 per cent of the cost of items such as educational software, home computers and associated costs, home internet connections, laptop computers, printers, school texts, stationery and trade tools used in school. The maximum amount of the rebate is $375 for each child in primary school and $750 for each child in secondary school.
Tax Saving South Africa
The way that a company or close corporation is set up has significant implications for the amount of tax payable. Whilst many small businesses still trade as sole traders or partnerships, the majority would actually pay less tax if they converted to a company.
The key is to structure the company or close corporation so that it can take full advantage of the tax saving benefits of a “Small Business Corporation”. As a guideline, any business with:
- an annual turnover not exceeding R 20-million, and
- not more than 20% of its revenue is derived from investment income or “personal services”, and,
- whose shareholders or members are all natural persons, and
- those members or shareholders do not own shares (other than listed shares) or members interest in any other company or close corporation
would justify a consideration of a Small Business Corporation.
Whether remuneration paid to the business owner falls within the 25% or 40% tax bracket, paying a “production bonus” wins over distributing a dividend. However, if your business qualifies as a “small business corporation” in terms of the income tax act, you will receive even greater tax savings if you distribute a dividend as opposed to paying a bonus. Ask your certified tax practitioner or accountant to do the calculations for you.
A micro business must have an annual turnover of under R1-million and can trade in either a company or as a sole proprietor to qualify. The upside of turnover tax for individuals is that most of the “red tape” of bookkeeping and accounting requirements are done away with. This does not apply to Close Corporations or Companies however, as their record keeping requirements are legislated. Sole proprietors benefit more from turnover tax than close corporations or companies.
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