Structuring your tax, an individual or a company.
Taxes are structured in to two entities that’s, individual or company. It means when your paying taxes you can either pay as an individual or as a company/business.
Yesterday I shared how to calculate rental tax as an individual (if you didn’t see the post check my timeline or YOUNG TREPS page). For those who did,you must have noticed that the tax deductibles were fixed with all expense allowances caped at 20%.This means only 20% of your earnings can be regarded as expenses even when you spend way more than that. The extra above 20% won’t be regarded as allowable expenses.
Let’s use an example. If your taxable revenue is 1,000,000 shs, as an individual you’ll be allowed to only spend 20% which is 200,000 meaning 800,000 will be taxed, meaning you’ll pay 160,000 in taxes. So if you expenditure goes above 200,000 for example 500,000 the extra 300,000 won’t be considered. So you’ll have to still pay taxes on those expenses too.
However companies are legally allowed to spend with no cap as long as this expenditure is legal and can be proven. This means a company can spend all the money it makes hence no taxes will be paid because there’s no balance to pay for. Imagine the 1,000,000 was made by a company for example. If the company spent 800,000 on rent,salaries,running costs e.t.c only the balance of 200,000 would be taxed which is 60,000 in taxes.
Using this example you notice that the difference between the tax paid by an individual and a company that both made 1,000,000 is about 100,000. The company pays 100,000 less or may also not pay anything at all if they spend all the 1,000,000 which is legally acceptable as long as they can prove they spent it unlike individuals who have a cap to how much they can spend even if they can prove they spent..
This makes it wise to register a business entity and pay tax as a business rather than individual if you have a regular source of income like rentals.
NB: the figures used are for purposes of learning. Substitute them with your actual figure.
Jaluum Herberts Luwizza is a Speaker,Writer, Columnist with the C.E.O Magazine and Contributor with the Nile Post.He is also a Business Consultant with YOUNG TREP East Africa’s No.1 Business Management and Consultancy firm that helps people start and grow profitable businesses.twitter:jaluwizza
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