The first rule that small-business owners should implement with regards to their taxes is to take it seriously.
Spend some time strategising for your business activities to save hundreds or thousands ringgit.
Here are six
Keep separate bank accounts for personal and business transactions and establish a basic accounting system.
The inland Revenue Board recognises business income on an accrual basis .
This means that as long as a transaction is completed, either a sale of goods or a provision of service , its value is immediately treated as business income and is taxable.
However , unpaid transaction can be reduced your taxable income.
Any expenses made fro the business can be deducted from the business income.
The General rule is that expenses can be deducted if it is wholly and exclusively incurred in earning your business income.
So Keep the receipts for all supplies that you buy for your business
However there is no deduction for capital expenditure although
some assets will qualify for tax relief by way of capital allowances
Capital allowances are permitted for certain business assets such as equipment , machinery , vehicles computers and software.
The amount of allowances permitted each year depends on the category that asset falls into .( refer to Public Ruling No 2/2001 for the deductible rate of your assets.
The first capital allowance is given for the accounting year in which the asset was purchased and used by the business.
If you are contemplating a purchase , try to do it before the end of the accounting year, instead of just after , to claim the capital allowance against your business income.
If you are buying the asset with a hire-purchase loan,
allowance can only be claimed as and when repayments are made to the lender.
If you are a sole trader or a partner in a business, any car or vehicle that is used for business purposes can bring about tax deductions.
“The business income is reduced by the car’s financing cost if you buy the car on hire-purchase.
You are also deduct a certain amount for capital allowances every year,
Before implementing this tax-saving technique, business owners must identify a percentage of the car’s use that is for private activities.
As there is no definite ruling on how to determine this proportion for private use, business owners must apply a fair and reasonable figure that can withstand scrutiny.
“Estimating private mileage is an exercise that must be undertaken in accordance to the facts on your actual usage.
And remember to record all running expenses to make these
deductions,” says Thornton.
An effective tax-saving strategy is to hire a spouse or family member.
“For example, a husband who is a business owner can hire his wife. The wife’s salary is tax deductible but you must be able to show that she is doing something to earn it,
In this situation, you would have to contribute to your wife’s Employees Provident Fund (EPF) savings and that amount entitles her to tax relief.
Another option is to make your spouse or family member a partner in your business.
This allows you to divide the income made by the business between the both of you.
As a partnership has no tax liability, both partners are liable for tax for the respective portion of business income that each earns.
“By opting for separate tax assessments, a husband and wife who are partners in a business can each claim individual tax relief.
Unfortunately, small business owners can complete a sale or service but might not receive payment, in full or in part.
At the end of an accounting year, a debt, which is estimated to be wholly or partly irrecoverable, can be deducted from your business income and this lowers your tax bill.
“Tax authorities tend to look closely at bad-debt write-offs and provisions (for debts that are expected to be partly recoverable).
So put in some effort to recover the debt before deeming it irrecoverable and you must evaluate each debt separately.
The process that you put in place to recover your unpaid debts should be documented and any conclusion that you make should be supported with documentation as well.
For example, you must show why it it not cost effective to take legal action against a customer.
However, if you eventually recover bad debts that have been written off or partially written off, you must include this amount in your taxable income for the year that you received payment.
Working in your own house can result in tax deductions for the costs related to your “home office”.
This includes electricity, telephone bills, quit rent and service charges of apartments.
The best way to claim for these deductions is to dedicate a room or place as the working environment.
“A dedicated area helps to identify expenses that are specifically for business purposes and can be claimed in full.
Items that are used by the business as well as personal use, such as electricity, must be apportioned.
One way to do so is on the basis of floor area.
If the business owner pays rent for the working area, this expense can be deducted from the business income.
This applies to rent that is paid to a spouse who owns the home but is not involved in the business.
However, this is strategy is only effective if the spouse who is not involved in the business is taxed at a low tax rate as rental received must be declared as taxable income.
If this is an appropriate strategy for the business owner, A tenancy agreement that specifies rental for a specific part of the house at the prevailing market rate.