How to Save Tax for your small business
Taking some time to strategies your business activities can save you hundreds to thousands ringgit.
1. Fully utilise your business expenses by maintaining a proper records
Keep separate bank accounts for personal and business transactions and establish a basic accounting system.
In general, income would be taxable on accrual basis, whenever sales transaction is completed, regardless of the payment. However, unpaid transaction can be deducted against your taxable income, subject to proof of debts.
Any expenses incurred for the business can be deducted against the business income, provided if it is wholly and exclusively incurred in earning your business income.
Evidence of expenses should be filed for at least 7 years.
2. Claim the tax incentive for your business assets
Capital allowances are allowed for most of your business assets.
Other than proof of ownership, the business asset should be used in the business in order to claim the first capital allowance for the accounting year in which the asset was purchased. As such, it is more benefiting if you purchase and use the business asset before the end of the accounting year, instead of just after.
The loan interest, which related to financing the related business asset could be deducted against the business income as well.
3. Register your motor vehicle under company name
Your company motor vehicle could enjoy the benefit as business assets as above mentioned.
However, pertaining to expense related to the motor vehicle, business owners must identify a percentage of the usage 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.
4. Employment of your spouse or family member
An effective tax-saving strategy is to employ your spouse or family member in your business operation.
For instance, a husband who is a business owner can hire his wife. The wife’s salary is tax deductible but there must be strong evidence that the wife is physically working for the business, such as maintaining accounting records, arrangement of procurement or sales activities.
In this situation, you would have to contribute to your wife’s Employees Provident Fund (EPF), which can enjoy a tax deduction of a maximum of 19%, and that amount entitles her to personal tax relief as well.
5. Implement a process to ‘chase after’ unpaid debts
As mentioned above, unpaid debts is deductible against the business income.
However, 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 instance, you must show why it is 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.
6. Dedicate a space in your home office
For those who are working in home based office, the best way to claim for tax 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, quit rent and service charges of apartments, must be apportioned, perhaps, on the basis of floor area.
