Article by listed accountant: Rakhi Popat
With less than a week to go for provisional taxpayers to submit their returns, this past week I have had several encounters with small business owners, in particular those operating under sole proprietorships. Most small business owners have asked for an all-inclusive list of what expenses are allowed to be deducted for tax purposes, and what expenses are disallowed. Each business is engaged in unique activities with unique expenses and therefore it is impossible to give an exhaustive list of the expenses that are tax deductible. So I have decided to write this blog with the aim of explaining how taxes work for people who are running their own businesses as sole proprietors.
In the eyes of SARS, the individual and the business are one and the same person, so your tax return is filed in your personal capacity and the taxable income generated by the business is included in your personal tax return which is filed annually via an ITR12 (which is a tax return for individuals). In addition to filing an ITR12, small business owners need to be registered as provisional taxpayers since they earn income other than by way of a salary. If you are a salaried employee and are also running a small business you also need to be registered for provisional tax. In summary, as a sole proprietor, one needs to file an ITR12 annually and 2 IRP6’s (provisional tax).
The cornerstone of tax law is this: One can only claim a deduction for an expense that was actually incurred in the production of income and that is not of a capital nature. Monies spent on goods or services that are actually necessary in order for the business to generate money, are tax deductible. Often however, there are some mixed use expenses such as a business owner who uses his car, telephone or internet for both personal and business purposes. Only the part of the expense related to the business is tax deductible and therefore one must be able to apportion the expense. Record management is key here. The first prize is to have a separate business bank account, and all business related expenses should be paid for using this account. This makes it much simpler to track your business related expenses. Keeping a proper record of your expenses as well as the invoices/slips that back them up is vitally important. This should be done regularly, to reduce the administrative burden when tax season arrives as well as ensuring the accuracy of the records kept.
I would like to briefly explain what is meant by “ not of a capital nature “mentioned above, as I have had several clients who would like to deduct for example their monthly car installment or bond repayment as an expense. These items are not tax deductible for the simple reason that they are of a capital nature. The business owner who uses his car for the purposes of business travel, will continue to use his car, long after it is paid off. The car represents a capital asset that is used in the business to generate income. While the car installments are not tax deductible, the wear and tear on the car as a result of business use is deductible as well as other travel costs provided you have kept a logbook that can attribute business kilometers traveled.
Another common question asked by sole proprietor’s concerns home office expenses. The principle is the following :
• if you spend greater than 50% of your work hours working out of your home office,and
•Your home office is used exclusively for the purposes of your trade,and
• it is properly equipped or set up for you to carry out your work in this space
Then you are able to deduct the home office expense. This is done by calculating the ratio of the floor area of the home office, to the total floor area of your home, applying the ratio to the expense, and deducting this fraction of the expense incurred.
My key points for those running their own businesses as sole proprietors would be the following:
1.Keep a separate business bank account.
2.Keep a proper record of all your income and expenditure, differentiating between personal and business expenditure.
3.Keep all supporting source documents such as slips and invoices