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Thread: Small business help

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    Small business help

    I'm starting a home and small business IT support company from home (I live with my parents). I've handed in the forms to register it as a Private company, waiting to get confirmation in who-knows-how-long from now, and want to dust any and all legislative issues I'm going to have before I get started. So!

    First things first, do I qualify for turnover tax? I'm assuming not, since more than 20% of my total income will come from "professional services" in the field of IT, which SARS have marked down:

    Professional service
    A service in the field of accounting, actuarial science, architecture, auctioneering, auditing, broadcasting, consulting, draftsmanship, education, engineering, financial service broking, health, information technology, journalism, law, management, real estate broking, research, sport, surveying, translation, valuation or veterinary science
    That being the case, do I now fall under the small business category, for regular income tax? Do I maybe qualify for another, less burdensome tax bracket?

    I live at home with my parents, and they want me to pay a monthly 'rent' for internet access, utilities, food, cleaning services, etc etc. Is it better for me to pay myself a salary that covers this rent, or to mark it down as a business expense? Keep in mind that my parents run their own business from home.

    The car that I currently use personally is under my father's name. Can I mark down all car-related expenses (petrol, parking, maintenance, cleaning, etc) as business expenses, since I'll be using it as my form of transport? Should I?

    I first took some tax advice from my parents, since they operate their own company. Their advice to me is to operate at a loss forever, so I don't owe any tax. Credit myself or them and find any and all expenses that can be paid by the company so it operates at a paper loss, not necessarily a realised loss. Now, I want your opinion on this, as I don't personally feel comfortable adjusting my 'apparent' income and expenses so as to avoid tax. I'd rather operate with a clean slate. Is this how businesses are carrying out their work in this country? Is this not legal fraud? They convinced me that it's pretty much the job of accountants to minimize your tax payment.

    That's all that's bugging me for now, I might come back with more. But until then I'd really appreciate your help in this regard!

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    Silver Member geraldenek's Avatar
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    You won't be able to qualify as a small business corporation and will thus be taxed at 28%.

    Why donít you rather operate in your personal capacity and when profits get to a place where your tax bracket is more than 28% start operating from the company?

    For your "rent" you will only be able to deduct business expenses e.g. food is not a business expense. You can either pay a salary or put the expenses on a loan account for the business. Depending on the amount of the salary Ė you will have to pay paye. If you decide to put it against the loan account there is some long term affects.

    For the car you can claim the actual expenses provided that you paid for it.

    Quote Originally Posted by Major View Post

    I first took some tax advice from my parents, since they operate their own company. Their advice to me is to operate at a loss forever, so I don't owe any tax. Credit myself or them and find any and all expenses that can be paid by the company so it operates at a paper loss, not necessarily a realised loss. Now, I want your opinion on this, as I don't personally feel comfortable adjusting my 'apparent' income and expenses so as to avoid tax. I'd rather operate with a clean slate. Is this how businesses are carrying out their work in this country? Is this not legal fraud? They convinced me that it's pretty much the job of accountants to minimize your tax payment.
    Just remember to create an expense you need to have an income on another side wether it is you or your parents. And creating a loss the whole time might not be such a good idea because further down the line you might need finance/investors and they look at it.
    Geraldene Kapp
    Professional Tax Help
    www.mytaxhelp.co.za

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    Dave A (20-Aug-11)

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    Site Caretaker Dave A's Avatar
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    Quote Originally Posted by geraldenek View Post
    You won't be able to qualify as a small business corporation and will thus be taxed at 28%.
    Interesting comment. Why not, Geraldene?

    This is the bit that really fascinates me though - a great discussion point:
    Quote Originally Posted by Major View Post
    Their advice to me is to operate at a loss forever, so I don't owe any tax. Credit myself or them and find any and all expenses that can be paid by the company so it operates at a paper loss, not necessarily a realised loss.
    I've heard so many people say this sort of thing. There certainly is merit in aiming to be tax efficient and claiming all legitimate expenses, but if you're making money (which is a core goal of being in a business in the first place, surely) there simply has to be income that is going to appear on someone's income tax return. The question really is - who's income tax return? Do you want to be taxed in the hands of the company or in your personal capacity?

    To some extent this isn't just a matter of calculating which way means the least tax is paid - you also need to look at your medium term goals for the business.

    Do you intend to sell the business or raise finance?
    In this case you really want to show as high a profit as possible in the hands of the company.

    Do you intend to buy property in your personal capacity that will require a personal bond?
    In this case you should be reflecting a healthy personal salary income.

    It really depends on what you want to achieve. So get those goals clear in your mind first.

    From there my advice, particularly in the first financial year of business, is focus on getting in as much business as you can, keeping expenditure down, and accumulating as much cash in the bank as possible. Then take a close look at things a couple of months before end of financial year to see if you should be doing any shuffling.

    Most important, don't go buying stuff just because you've got money in the bank (or in your pocket)!!! Wait until all the bills (including taxes) are paid before you consider that money yours to spend as you like.

    R1000.00 feels like nothing when it's lying around "idle." It feels like an absolute fortune when you have to pay R1000.00 now for something and you simply don't have it available.
    The trouble with opportunity is it normally comes dressed up as work.

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    Mark Atkinson (20-Aug-11)

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    Quote Originally Posted by Dave A View Post
    You won't be able to qualify as a small business corporation and will thus be taxed at 28%.
    Interesting comment. Why not, Geraldene?
    I believe it's because IT support is a professional service, and professional service suppliers don't qualify for registration as small business corporations.
    "The way to gain a good reputation, is to endeavor to be what you desire to appear." - Socrates
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    Dave A (20-Aug-11)

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    Silver Member geraldenek's Avatar
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    The following are the requirements that should be met in order to qualify as small business corporation:

    Shareholders and members must be natural persons and must hold the entire shareholding during the entire year of assessment.
    The gross income for the year of assessment may not exceed R14 million.
    Not more than 20% of the gross income (receipts, accruals and all capital gains) of the company or close corporation must consist collectively of investment income and income from the rendering of a personal service.

    Personal service means:
    Any service in the field of accounting, actuarial science, architecture, auctioneering, auditing, broadcasting, brokering, commercial arts, consulting, draftsmanship, education, engineering, entertainment, health, information technology, journalism, law, management, performing arts, real estate, research, secretarial services, sport, surveying, translation, valuation or veterinary science.
    Which is performed personally by any person who holds an interest (ie. member of close corporation or shareholder of company) in the company or close corporation referred to in the definition of small business corporation.

    Investment income means:
    Income in the form of dividends, royalties, rental, annuities, or similar nature. Income in the form of proceeds derived from investment or trading in financial instruments, marketable securities or immovable property.
    Shareholders or members may not at any time during the year of assessment hold any shares or interest in any other company or close corporation (other than a listed company, unit trust, share block company, or sectional title body corporate).
    The company or close corporation must not be an employment company.

    If you are engaged in the provision of personal service you will have to maintain at least 3 full time employees (none of whom may be a shareholder or connected person in relation to the shareholder) for core operations
    Geraldene Kapp
    Professional Tax Help
    www.mytaxhelp.co.za

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    Dave A (20-Aug-11)

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    Diamond Member Blurock's Avatar
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    Quote Originally Posted by Major View Post
    Their advice to me is to operate at a loss forever, so I don't owe any tax.
    I'd rather operate with a clean slate. Is this how businesses are carrying out their work in this country? Is this not legal fraud? They convinced me that it's pretty much the job of accountants to minimize your tax payment.
    Let your conscience guide you to do the right thing. There are legal ways of reducing your tax liability, but avoiding tax is illegal.

    You can not have your bread buttered on both sides. You may save a bit by not paying tax, but the day will come when you may need financial assistance for that exiting contract or business expansion. Lenders look at business performance and no-one will fund you if you have negative cash flow and accumulated losses year after year. Should the objective of a business not be to grow and be successful? If it is, someone may make you an offer either to invest or to buy the business.

    Greece is in financial trouble for a number of reasons, but one of them is that no-one wants to pay tax. Someone has to pay for the infrastructure of roads, schools, a legal system, water lights etc etc.

    Yes, I know we pay too much, but you do not have to become one of the uncivilised mob that breaks more than they build. Pay to Ceasar what is due to Ceasar.
    Excellence is not a skill; its an attitude...

  11. Thank given for this post:

    geraldenek (22-Aug-11), Newretailer (22-Aug-11)

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