5 Essential Taxation Tips For Small Business Owners
Taxation tips are essential for every entrepreneur that runs an SME in Africa. Interestingly, many individuals and businesses run away from the idea of taxes and taxation. It is your obligation as a business to pay tax to the country’s government where you derive income.
One of the reasons businesses default in paying taxes is their lack of knowledge and poor planning. This post will explain the idea of taxation and then provide you with five essential taxation tips.
Taxation
It is no secret that most business owners in Africa, especially sole proprietors, evade tax. This is because they don’t know what taxation means and the implication of evading taxes. Taxation refers to a process through which a government or designated body imposes levies or financial obligations on residents.
In a nutshell, taxation applies to every kind of involuntary levy that individuals or businesses are required to pay to the government. The revenue gotten from taxation is known as “tax.” There are several reasons why we should pay taxes as owners of SMEs in Africa. A few includes:
- Sustain the government.
- Social welfare and security.
- Avoid prosecution from back taxes.
With this foundation in place, let’s share some interesting taxation tips with you.
Essential Taxation Tips for Small Business Owners
When you go into business, one of your main aims is to “make money.” We cannot exempt paying taxes from making money. Like we mentioned above, paying taxes is an obligation. But the question is this, “how do you pay taxes without stress?”
This is where our essential taxation tips come in. We will show you a few tips to improve your tax planning as a business in 2021.
Choose a Suitable Business Structure
There are different business structures. The structure that you choose will determine how the government recognises your business. This goes on to affect how much you will pay as tax. Here’s a recap of the different business structures for better understanding:
- Sole proprietorship
In this case, you run the business as an unincorporated entity by yourself. You and the business share an identity, so you bear all the burden and enjoy all the profits.
- Partnership
Here, two or more individuals run the business. There are three types depending on the legalities involved. They are joint ventures, limited partnerships, and general partnerships.
- Limited Liability Company (LLC)
In this case, a single individual or a group of individuals may own the business. However, the business has a different identity from the owners. Usually, different countries have different requirements for LLCs. It is important to check before starting one.
Others include S-corporation and Corporation. If you run at a sole proprietorship level, you shouldn’t register with the government as an LLC. Doing this will mean that you will pay more in taxes, which will hurt your business.
Know the different kinds of taxes
Many owners of small businesses don’t have the slightest idea what kinds of taxes exist. Without this knowledge, how can you even plan to pay taxes? Here is a rundown of the different kinds of taxes available.
- Income tax
This tax is levied on every entity within a government’s jurisdiction, whether individual or business.
- Corporate tax
This tax is imposed on business profits.
- Capital gains
This form of tax is imposed on profits or capital gains from the sale of assets. Such assets include real estate, bonds, or stocks to mention a few.
- Property tax
The local government levies this tax on property. The owner pays tax based on the land or property value.
- Sales tax
This tax is imposed on the sales of goods and services. It could be “goods and service” tax, excise tax, State sales tax, or value-added tax (VAT).
With this knowledge, you know which kind of tax you should prepare to pay each month. Find out from your local tax authorities how much you should be paying.
Pick your Accounting Method
Whether your business is physical or digital, keeping accounting records is very important. You must track both your revenue and expenditure. While there are several kinds of accounting methods, small businesses make use of any of the two below:
- Accrual method
In this case, you account for how much income or revenue you make in a tax year. It also allows you to determine how much you are owed with a high level of accuracy. In essence, it reports income and expenditure that is expected based on goods sold or services delivered.
- Cash method
Here, you are accounting for the income that you receive in a tax year. It also accounts for the expenditure you make in a tax year that was actually paid. This means that if you don’t receive the income or make any expenses, there is nothing to record. It is the most common accounting method for small businesses.
You can adopt any of these methods to make your calculations. However, depending on your business needs, you may need a special accounting method not mentioned above.
Know the tax breaks that apply to your business
This is one of the most important taxation tips on our list. Every tax system makes certain tax breaks available to different businesses. It is a matter of knowing which you qualify for so that you can enjoy them. Some of the most common tax breaks include:
- Alternative vehicle credit.
- Disabled access credit.
- Work opportunity credit.
You can check with your country’s Internal Revenue Service to find out which tax breaks are available. This will give you some leverage in the nearest future.
Prepare for the Tax Season Now
This is the final tip on our list, and it is pretty simple. Don’t wait for the tax season to come, start preparing for it now. A good way to do this is to create a separate account for your business even if you run a sole proprietorship. This will help you have proper documentation for income and expenditure. More than anything else, keep records.
Conclusion
Taxation is not as complicated or difficult as we imagine. We have shown you a few important taxation tips in this post. Don’t forget; you must pay taxes, so start preparing to do so from now.
