The Deducting Business Expenses Accounting Essay
Dividend is a share of the after tax profit distributed to the shareholders according to the class of shares and number they have.
The small companies always distribute dividends at the end of an accounting year. The larger companies usually distribute dividends every quarter. The board of directors can decided timing and the amount of the dividends. The preferred stock holders receive dividends first and at a fixed rate. Ordinary shares can receive any amount of dividend based on the level of profit of the company. Under normal circumstances, all dividend payments are taxable, often at the source.
These are a distribution of profits, so the company must be making a profit before paid dividends. If there is no profit, only two ways to repayment of the director’s loan and salary. The directors must be votes on and minutes drawn up before the year end to decide on the distribution of profits in dividends. The company must pay dividends to all shareholders. To pay the dividends, the company must hold a director’s meeting to declare the dividends and keep minutes of the meeting, even if you are the only director. You must include a dividend tax credit in the value of the dividend when you record it in company’s accounts. The tax credit means the company and the shareholders do not need to pay tax when the dividend is paid, but the shareholders may have to pay the tax.
For dividend payment of the company, the dividend voucher must showing the company’s name, date, shareholders’ name, amount of the dividend and the amount of the dividend tax credit. You must keep two copies of the voucher, one for your personal tax return and one for your company records.
If you put your own money into the company, then this is recorded in the director’s loan account which totals the money the company owes you. If the cash flow of the company can support, you can draw from this at any time without any tax liability. While it sits in the company you are entitled to charge the company interest. The interest rate is determined by the Board of Directors and should be at a reasonable commercial rate. The interest you receive must declare on personal tax return as it will be subject to tax.
If you want the company pay you a salary, expenses or benefits, you must register the company as an employer with HM Revenue &Customs.
Deducting Business Expenses
Business expenses are the cost of carrying on a trade or business. These expenses are usually deductible if the business is operated to make a profit.
Which expenses can be deducted from the profits of the company?
To be deductible, a business expense must be both ordinary and necessary. An ordinary expense is common and accepted in your trade or business. A necessary expense is helpful and appropriate for your trade or business. An expense does not have to be indispensable to be considered necessary.
Separate business expenses are important of the following expenses:
â€¢ The expenses used on the cost of goods sold,
â€¢ Personal expenses, and
â€¢ The expenses on capital
Cost of Goods Sold
If your business manufactures products or purchases them for resale, you must value inventory at the beginning and end of every tax year to determine your cost of goods sold. The cost of goods sold may include some of your expenses. Cost of goods sold is deducted from your gross receive to figure your gross profit for the year. If you include an expense in the cost of goods sold, you cannot deduct it in business expense.
There are four types of expenses can go into figuring the cost of goods sold.
â€¢ The cost of products or raw materials, including freight
â€¢ Direct labor costs ,including annuity plans or contributions to pensions for workers who produce the products
â€¢ Factory expenditure
Under the uniform capitalization rules, you must capitalize the direct costs and some of the indirect costs for certain production or resale activities. Indirect costs include tax, rent, interest storage, processing, administrative costs, purchasing, handling, and repackaging.
If your average annual gross receipts (or those of your predecessor) for the preceding 3 tax years are not more than $10 million, this rule does not apply to personal property you acquire for resale.
The expenses on capital
You must use, not to deduct, some costs. These costs which are called capital expenses, are a part of your investment in your business. Capital expenses are deemed to assets in your business. In an ordinary way, there are three types of costs you capitalize. First one, start-up cost of the business. Second, company assets. Thirdly, improvements.
In a general way, you cannot deduct personal, family, or living expenses. However, if you have an expense used partly for business and partly for personal purposes, divide the total cost between the business and personal parts. You can deduct the business part of it.
For example, if you borrow money and use 85% of it for business and the other 15% for a family travel, you can deduct 85% of the interest as a business expense. The other 15% is personal interest and can not deductible.
Business Use of Your Home
If you use your home to do business, you should be able to deduct expenses for the business use of your home. These expenses are includes depreciation, utilities, repairs, insurance and mortgage interest.
Business Use of Your Car
You can deduct car expenses if you use your car in your business. You must divide your expenses based on actual mileage if you use your car for both business and personal purposes.
Other Types of Business Expenses
â€¢ Salary to employees – In a general way, you can deduct the fees you give your employees for the services they perform for your business.
â€¢ Retirement Plans – Retirement plans are savings plans that offer you tax advantages to set aside money for your own, and your employees’ retirement.
â€¢ Rent Expense – Rent is any amount you pay for the use of property you do not own by yourself. In general, the rent is only for property you use in your trade or business you can deduct the rent as an expense. If you have or will receive equity in or title to the property, the rent is not deductible.
â€¢ Interest – Business interest expense is an amount charged for the use of money you borrowed for business activities.
â€¢ Taxes – You can deduct various federal, state, local, and foreign taxes directly attributable to your trade or business as business expenses.
â€¢ Insurance – Generally speaking, you can deduct the ordinary and necessary cost of insurance as a business expense, if it is for your trade, business, or profession
Whether any relief against corporation tax will be available to him if he incurs trading losses in the first year of trading as a limited company.
The earned income relief is available to him, if he incurs trading losses.
Earned income relief is a relief to provide recognition for individuals who receive income from business, work, trade, profession or vocation.
If his age is below 55, the earned income relief is $1,000. The age between 55 to 50, the earned income relief is $3,000. If the age is above 60 years old, the earned income relief is $4,000.
Goods and Services Tax (GST) looks like Valued Added Tax (VAT) in other countries. It is a relatively new form of tax in Singapore. Goods and Services Tax was implemented on 1st April 1994 in Singapore. Goods and Services Tax(GST) is levied on the supply of goods and services in Singapore and the import of goods into Singapore. GST is an indirect tax. The rate of GST is 7%, bases on the selling price of goods and services provided by GST registered business entities in Singapore. Collection GST is seen as a means to lower personal and corporate income tax rates while maintaining a steady revenue base for the government.
If the company is GST registered, it means the company should collect GST tax from the customers because of the goods and services rendered by the company, and then the company should collect the tax payment to tax authorities.
E.g. Company A took S$50 from the customer for the service, A must invoice the customer S$53.5($50+$50*7%). The GST should collect by the tax authorities and then give to the tax department in Singapore on a quarterly basis via GST tax filing.
There are two ways for GST registration, one is compulsory registration, the other one is voluntary registration.
For government, Goods and Services Tax will produce a stable and predictable tax revenue. This is an effective tax, due to relatively low cost management and recovery.
It allows the government to reduce corporate tax and personal income tax, so as to encourage more foreign direct investment. This will lead to overall economic growth.
A company to become GST registered can let the customers think this company has a certain scale and good economic strength. Goods and services tax is a more fair tax system. When the self-employed and wage earners spend their own money, they should pay Goods and Services Tax. GST tax only applies to consumption. Savings and investment no need to pay GST. This will encourage people to more saving and investment.
Business cost reduction, which helps to lower prices to do business. But find accountant accounting GST would be a very high cost for the company. Some no GST registered customers might not be too pleased even though the company costs are reduced because the company can recover GST. Goods and services tax is the burden of low-income groups, especially in the price rising period must pay the tax of 7%. Sale or lease of residential land and financial services no need to pay GST.
If the company conforms to the goods and services tax turnover threshold, then the company must be registered. If the company does not do, it will face a fine.
The company can take all the GST in company procurement aspects. This is good to new development of enterprise because of their high cost, and their income is low. This is particularly useful, if you want to buy large objects, such as computer or car to be used for your enterprise.
On the other hand, the company will have to give their customers impose consumption tax. If their customers are mainly in individual consumers, they don’t have the right to obtain goods and services tax credit. So, if the company is register, they will increase their price includes GST and their customers will bear the burden. Not a registered enterprise is one of the advantages of them do not impose consumption tax to their clients, can be a little more competitive market or increase their profit space. If the customers are other enterprise, there is no difference, for they may also GST registered business. If the company operation is very small, then the management may cost more than the benefits of registration