Tax Saving Tips for Small Businesses
Tax is often confusing to small business owners because of the complex nature of the law itself. Below are some tax saving tips available to businesses:
Get your structure right – 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”.
Don’t leave money on the table – Out-of-pocket expenses landed as the number one overlooked deduction that experts have observed, followed by motor expenses. So save those receipts for coffee shop, lunch, parking and cell phone pay-as-you-go airtime and write-off that iPhone 5 and iPad – it will all add up in the end.
Travel allowance or company car? – If your company purchases a vehicle and it is used for both business and private travel, you will be taxed on the fringe benefit value for the private use. In most cases, a travel allowance wins, but it is entirely dependent on the “determined value” of the vehicle, the total kilometres driven over a financial year and the business travel related to those kilometres. It requires you to keep a log book as no deductions are allowed without one. Only your accountant or tax practitioner will be able to do the calculations to determine which option will save you more tax, based on the various factors relevant to your specific circumstances.
Dividend or bonus – 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.
Employee leave – Your employee contracts should, at the minimum, comply with the Basic Conditions of Employment Act. As annual leave can be taken up to 6 months after the annual leave cycle, ensure that your business claims a deduction for outstanding leave pay at the end of the financial year.
Commission – As the business owner, your members or directors salary can be structured in a way to incorporate commission as opposed to a salary. No expenses are deductible against a salary, other than retirement annuity contributions, but expenses are deductible against commission income.
Charge your business interest – Healthy businesses should owe money to its business owner (what we refer to as a “credit loan account”). You can write off interest as a business expense on your company tax return to get a bigger tax deduction. However, the interest your business pays you is income in your personal capacity, but the first R23,800 is tax free.
