23 Nov 2009

Tax Credit vs Tax Deduction

by Darren

I think it is important to note at this point some key differences in tax related terminology This entry will focus on the distinction between a tax deduction and a tax credit. The core concept is that deductions reduce the amount of your income that is taxable. Tax credits reduce the actual amount of tax owed. A tax deduction represents an expense incurred by you the taxpayer. These amounts can be subtracted from your gross income when preparing your income tax returns. As a result, the tax deduction will lower overall taxable income and thus lower the amount of tax paid. In previous and upcoming entries we have/ will analyze all the types of deductions available to your business in multiple jurisdictions (Australia, China, Hong Kong, Japan, Singapore and the USA). A tax credit, on the other hand, is broken down into two different concepts: The recognition of tax payments already made. A benefit allowed to your business through the tax system which reduces your the amount of tax payable. Examples include:
  • Credits for foreign taxes paid
  • Disabled Access Credit - tax credit for making their businesses accessible to persons with disabilities (USA).
  • Fuel Tax Credits (Australia)
Example
    Net Business Income $150,000
    Office Rent $10,000
    Office Expenses $5,000
    Total Deductions $15,000
    Taxable Income $135,000
    Tax Payable 15% $20,250
    Foreign Tax Credit $15,000
    Net Tax Payable $5,250
So you can see that the deductions reduce the income which tax is charged upon, while the tax credit reduces the actual amount of tax paid to the government. We will look into the tax credits available in each country in the near future.
21 Nov 2009

Australian Small Business Tax Deductions

by Darren

So how can a small or medium business determine their allowable deductions in Australia? Any expense that you incur must be directly related to earning assessable income before you are entitled to claim it as a deduction. Common deductions that can be claimed include: Advertising expenses Are eligible for a deduction if you incur these to:
  • sell you inventory,
  • hire employees or
  • gain publicity of your business name
Business travel expenses These are deductible if you have:
  • written evidence of all expenses
  • travel records, if your business travel was for six or more consecutive nights away from home.
Fringe benefits tax Can be claimed as a deduction for the costs you incur when you provide a fringe benefit to an employee including any fringe benefits tax you pay. Expenses related to your home work area If you operate your business from home, you may be able to claim a deduction for:
  • occupancy expenses, such as rent, mortgage interest, rates, land taxes and house insurance premiums
  • running expenses, such as phone, internet fees, depreciation of office furniture and equipment etc.
If your home is your place of business and you have an area set aside exclusively for business activities, you may be able to claim both running and occupancy expenses. If you carry on your business elsewhere and also do some work at home, you cannot claim occupancy expenses even if you have a home work area set aside. Phone expenses If you use a phone solely for business, you are entitled to claim a deduction for the phone rental and calls, but not for installation costs as these are capital in nature. If you use a phone for both business and private calls, you can claim a deduction for business calls and part of the rental costs. The following formula can be used to determine the percentage of phone rental expenses you can claim. (Number of business calls made and received x 100) / Number of total calls Super contributions (pension fund for those who are not Australian) You are entitled to claim a deduction for super contributions you make for yourself or your employees to a complying super fund or retirement savings account. Salary and wages If you operate your business as a company you can claim a deduction for any salary and wages it pays to you or any other employees. If you operate a partnership or sole proprietor then only salaries paid to employees are deductible. Salaries paid to the [partners or your self are not deductible. Tax-related expenses You can claim the expenses you incur in managing your business taxes. These expenses include:
  • Bookkeeping costs associated with preparing your business records
  • Fees for preparation and lodgement of tax returns and activity statements
  • Costs relating to objecting or appealing against an assessment
  • Costs associated with attending a Tax Office audit.
19 Nov 2009

Tax Deductions

by Darren

The basic formula for calculating income tax is by deducting ``general'' and ``specific'' deductions from the total assessable income. A ``general'' deduction is an outgoing that is connected with income or business activities, and that is not of a capital, private or domestic nature. A capital outgoing would be something like the purchase of a building. Private or domestic in nature refers to items such as the payment of your utilities in your personal residence. These are generally non deductible, however, later I will explain how you can generate deductions for these types of outgoings under the various countries tax laws. A general deduction would include payments for office rent, salaries and office stationary as these are directly related to the generation of income and business activities. A ``specific'' deduction, on the other hand, is an amount that has been specifically identified in the tax legislation as an allowable deduction. Items may include entertainment expenses. These are treated as a specific deduction as there are a number of rules to comply with in order to be able to claim these types of expenses as a deduction, if these rules specified are not met then the expense will not be allowed as a deduction We will look at the deductions available to small and medium businesses in Australia, Singapore, Japan, USA, Hong Kong and China over the next few weeks. I hope that you will be able to use this information to help in your tax planning activities for your business.
17 Nov 2009

Tax Break

by Darren

Sorry I have taken a bit of a break form tax blogging to complete and intense research paper on tax avoidance as part of my masters program. If you are interested in please read the attached pdf. Fiscal_Avoidance_and_Evasion.pdf
10 Sep 2009

Hong Kong Profits Tax

by Darren

We identified that in Hong Kong business are only taxed on profits that are sourced in Hong Kong. The profits tax is a simple calculation of income less expenses which equates to Assessable Profits. It is the assessable profits that is taxed at 16.5% for Corporations and 15% for unincorporated businesses. A number of exemptions are granted by the Inland Revenue Ordinance including
  • Dividends from a Hong Kong company which paid Hong Kong taxes
  • Interest on deposits placed in Hong Kong which are accrued after 22 June 1998.
In terms of expenses these are deductible to the extent that they are incurred in earning income. Personal or private expenses such as travel from home to work are non deductible. We will analyze the full list of deductible and non deductible expenses in a few weeks
08 Sep 2009

Japan Taxable Income

by Darren

Under Japanese tax law there are eight categories of ordinary income Interest Income which includes interest from savings accounts, bonds, trusts. Interest is generally taxed under the withholding tax rules and is taxed at 20%. Dividends which includes distributions to stockholders of income from corporations. There are 3 methods of taxation
  • Aggregate Assessment whereby dividends are included as ordinary income in the final return submitted to the National Tax Agency (NTA).
  • Dividends less than
05 Sep 2009

US Business Structures

by Darren

Under US tax law business income is income received for products or services sold. For example:

  • Fees paid to a professional person are considered business income.
  • Rents paid to a person in the real estate business are business income.
  • Payments received in the form of property or services must be included in income at their fair market value.

A business is generally structured as either a sole proprietorship, partnership, or corporation.

A sole proprietorship is the simplest form of business organization. It has no existence apart from its owner. Business debts are personal debts of the owner.

A partnership is an unincorporated organization that is created by two or more persons agreeing to carry on a trade or business. Each person contributes a combination of money, property, labor, or skills, and each expects to share in the profits and losses. A limited liability company with more than one owner is generally treated as a partnership for tax purposes.

A corporation, generally includes a business formed under Federal or state laws that refer to it as a corporation, body corporate, or body politic. It also includes certain businesses that elect to be taxed as a corporation. The owners of a corporation are the shareholders.

Corporations that meet the following requirements may elect to become S corporations. Such corporations are treated in a manner similar to partnerships such that the profits are distributed to the shareholders and declared on their annual tax return as an individual thus the S Corporation in itself is not subject to taxation.

Requirements for an entity to be treated as an S corporation

  • Must be an eligible entity that is a domestic corporation, or a limited liability company
  • Must have only one class of stock. For example Ordinary share only (Cannot have both ordinary and say preferential)
  • Must not have more than 100 shareholders. Note: Spouses are automatically treated as a single shareholder.
  • Shareholders must be U.S. citizens or residents, corporate shareholders and partnerships are to be excluded.
  • Profits and losses must be allocated to shareholders proportionately to each one's interest in the business.

So why would a person set up an S corporation as opposed to a C Corporation?
Where the individual tax rate is lower than the C Corporation tax rate then its a far better option.

The current C Corporation tax rates are as follows:

Taxable Income ($) Tax Rate
0 to 50,000 15%
50,000 to 75,000 25%
75,000 to 100,000 34%
100,000 to 335,000 39%
335,000 to 10,000,000 34%
10,000,000 to 15,000,000 35%
15,000,000 to 18,333,333 38%
18,333,333 and up 35%

The current Individual Tax rates are as follows:

Taxable Income ($) Tax Rate
0 to 8,025 10% of the amount over $0
8,025 to 32,550 $802.50 + 15% of the amount over $8,025
32,550 to 78,850 $4481.25 + 25% of the amount over $32,550
78,850 to 164,550 $16,056.25 + 28% of the amount over $78,850
164,550 to 357,700 40,052.25 +33% of the amount over $164,550
357,700 and up 103,791.75 + 35% of the amount over $357,700

03 Sep 2009

Singapore Assessable Income

by Darren

Under Singapore Tax law the term "income" is not defined. In the case of a trade or business all receipts which are normally related to the "movement of capital or stock" are generally income in nature. Those related to fixed capital are of a capital nature. There are two questions that can be asked to determine income: Does the receipt arise from the carrying on of the trade or business? If a receipt has little relevance with the business or falls outside the scope of its operations it cannot give rise to a gain or profit from the trade. Is it a capital or a revenue receipt? If the receipts are determined to be capital these are not taxed in Sinagpore. Generally, flows from an employment will be treated as income receipts. Receipts in the nature of compensation for wrongful dismissal or relating to loss of office are not considered as flowing from an employment; they do not arise from a source, rather they are received because a source is destroyed. They are therefore not assessable. There are six types of income that are chargeable to tax under Singapore Tax Law:
  • profits or gains of a trade, business, profession or vocation
  • profits or gains from employment
  • dividends, interest and discounts
  • pension, charge or annuity
  • income from property

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