sole proprietorship and taxation

[salmonella]

I realise that any advice I get would be unofficial, and probably nobody here is an accountant, but I'd still be grateful for advice from any of the experienced folk around.

Suppose you have a day-job and you derive regular income from that. Further suppose that you register a business as a sole proprietor and it is some kind of web hosting, reselling or web site design business. You will need to spend some money on the business - perhaps some in advertising, web hosting expenses as a reseller, or capital costs in purchasing a server. You will also gain some income from the services that you provide.

Having read some of the documents at RCB and IRAS about taxation, I'm still quite confused...

It seems that the sole proprietor is taxed at the same rate as for resident individuals. It seems that business expenses (such as the advertising fees or web hostings costs) can be claimed as allowable business expenses/deductions (http://www.iras.gov.sg/sole%20proprietors/sole_expenses.htm). Similarly, the server purchase can be claimed as capital allowance using a one-year write-off scheme (http://www.iras.gov.sg/sole%20proprietors/sole_allowances.htm).

So if the business makes money, would I be correct to say that the income from both your regular job as well as the business is taxable, less all your personal reliefs and business expenses and business capital allowances?

Is this also true if the business loses money? In the worst case, I'd make no money at all, but I still have to pay the business expenses and capital costs. Will I still be able to claim deductions from all my personal reliefs, business expenses and business capital allowances?

[DoorKeeper]

Business expenses and capital allowances are to be deducted against your [business] taxable income. You pay your dues for the [earned income/salary] regardless of whether you are profitable in your business. Otherwise everyone will put up and run a loss-making sole proprietorship to reduce the tax they have to pay.

But if your day job is not in the form of [earned income/salary/bonus], ie. you contract yourself to your employer and receive a fee (no CPF) using your business name, then the tax you pay in total might see a fall.

[salmonella]

Originally posted by DoorKeeper
Business expenses and capital allowances are to be deducted against your [business] taxable income. You pay your dues for the [earned income/salary] regardless of whether you are profitable in your business. Otherwise everyone will put up and run a loss-making sole proprietorship to reduce the tax they have to pay.


Aha, but there's the rub. Surely in a sole proprietorship where the business is not a seperate legal entity, you are taxed based on the union of personal & business income+deductions (but do shoot me down if I'm wrong about that)?

After all, if you earn 15K in your day job and another 15K in your business, they'll want to tax you up to the 30K bracket, instead of keeping personal and business seperate, and taxing you twice independently up to the 15K bracket (which might even be 0 for the year 2003).

The thing about the business deductions is that they have to be for legitimate business purposes anyway.

If I'm being totally dumb about the whole thing, please just shoot a one-liner to say that I'm wrong, and I won't go down this alley any further :)

[NeonHQ]

This is just what i think. I am not sure about anything. Just my personal comments.

Your regular income will still be tax normally.
Your business income will also be tax normally separate from your regular income even though it is a sole proprietorship.

I guess the sole proprietorship comes in when there are legal issues such as bankrupt, they will take hold of all your personal assets to repay your debts, since you and your business are 1 legal entity.

[DoorKeeper]

I can go bounce this off a real accountant . . . and end all this speculation. I will be back (Governor Arnie).

[salmonella]

Originally posted by DoorKeeper
I can go bounce this off a real accountant . . . and end all this speculation.

That'd be great! You guys are probably right, and I'm just being dumb, though.

I will be back (Governor Arnie).

Haha :cool:

[royong]

DoorKeeper :: I like the "GOVERNOR ARNIE" touch. He better be back coz with the debts that Cal. is raking up, he will need every bit of that promise ....

As for the main question - I would really appreciate if you can provide the information from the accountant. I'm particularly interested in
But if your day job is not in the form of [earned income/salary/bonus], ie. you contract yourself to your employer and receive a fee (no CPF) using your business name, then the tax you pay in total might see a fall.

and have been toying with this for a few weeks now.

Geez, with all the planning and changes that I will be raking up come March 2004, I really need some good FREE advice. Any FREE advice accountant, financial planner, lawyer to recommend ?

[DoorKeeper]

Ok guys. I have already described the scenario salmonella painted to the accountant. Will have a written answer here shortly.

Lawyer, Roy ? You are in luck. I have a church friend who is a legal counsel specialising in IP (Intellectual Property) and was one time drafting contracts for Equant (network and datacomms carrier). So if you you want your bases covered, you can buy him dinner and have a chit chat.

[Zoomer]

Originally posted by NeonHQ
This is just what i think. I am not sure about anything. Just my personal comments.

Your regular income will still be tax normally.
Your business income will also be tax normally separate from your regular income even though it is a sole proprietorship.

I guess the sole proprietorship comes in when there are legal issues such as bankrupt, they will take hold of all your personal assets to repay your debts, since you and your business are 1 legal entity.

I was given the impression that your income (from all sources, employer, profits from sole prop.), will be added together and tax will be calculated from the appopriate bracket.

By the way, does anyone know where to get the tax rates for incoperated companies? Couldn't find it anyway despite poking around the gov's site. :)

[DoorKeeper]

Ok, the Accountant has spoken. Here goes:

(1) Personal earned income and revenue from Sole Proprietorship taxed at same rate (different for Pte Ltd)

(2) No written provision that losses from Sole Proprietorship can reduce taxable Earned income (ie. salary, bonus, comsissions)

(3) But unwritten policy is to reduce the tax burden on entrepreneurs. So if your Sole Proprietorship is not profitable, submit your Earned income and Business income returns together. One might see some compassionate deductions by the tax man.

** The source is a Chartered Accountant but I cannot vouch for the accuracy of his reply.

[salmonella]

Thanks!

I guess this means that what Roy was contemplating is still a go... and that what I'm thinking is worthless. I might as well save the money that would be spent registering the business :)

[Zoomer]

If you incur a business loss after deducting the allowable expenses, this business loss and capital allowances claimed can be offset against your other income in the same year, such as employment, interest, dividend and rental income.

http://www.iras.gov.sg/sole%20proprietors/sole_allowances.htm

Maybe it's something new?

[chin]

hmm, that will include the PC as well as notebooks that I used for business purposes...

[royong]

now ... that's what I call good news. essentially it confirms my initial thoughts. If I'm able to register a business and then carry out a cross-bill to my bosses for services rendered, I will not be limited to just simply employment taxes. I will be running a P/L business which essentially means that all equipment and capital expenses incurred for the business can be offset via the received income. Mmm.... nice.

DoorKeeper -> thanks for running it off with the Accountant. Will KIV the offer for the lawyer. Dinner would not a problem -- Mmm, perhaps you could tag along too.

[DoorKeeper]

Originally posted by royong
DoorKeeper -> thanks for running it off with the Accountant. Will KIV the offer for the lawyer. Dinner would not a problem -- Mmm, perhaps you could tag along too.

Roy, thanks. Will take you up on that offer some day.

[salmonella]

Hi. For what it's worth, I had shot my question to IRAS some time ago, and they've finally responded. This is what I asked:


I am currently a salaried employee, so I pay income tax based on my salary as usual. I'm considering registering a small business as a sole proprietorship while retaining my job. How will I be taxed?

1) Will I be taxed at a single tax bracket for my salary + business profits or according to separate tax brackets, one for salary and one for business profits?

2) I suppose this question only makes sense if I'm taxed at a single tax bracket. With new businesses, there is no guarantee that I will start making money immediately. If I initially make a nett loss in the business, can I offset the sole proprietorship losses against my employment income?


This is what IRAS answered.


You may wish to know that you are required to declare the income derived from your sole-proprietorship together with your income from all other sources in the Income Tax Return issued to you. The personal income tax rate will be applicable on the chargeable income (total income less donations less personal reliefs).

Generally, all expenses which are wholly and exclusively incurred in the production of income are allowable. You may offset the sole-proprietorship's losses against your employment income.

[NeonHQ]

so if you are making a loss in your sole proprietory business, it can offset from your normal salaried income. This is good.

[Hostings]

Yes. Hmm.. Not a bad idea indeed. But who wants to make a loss? LOLx.

[shahfik]

If I run a home based business, how do I calculate the utilities and telephone bill? I guess that would include my handphone bill as well...

Anyone using any accounting software?

[shahfik]

IRAS also mentioned you can claim "public transport incurred in the course of business" as business expenses but not "cost of travelling to and from your home". But what if your home IS your business premises? hmmm...

[fred]

Originally posted by shahfik
If I run a home based business, how do I calculate the utilities and telephone bill? I guess that would include my handphone bill as well...

Anyone using any accounting software?

You might want to try Microsoft Money or Quicken, there are some other accounting solfware that is less sophisticated, but i dont really have experience with those stuff.