If I set up a business will I pay a fortune in tax?
I get asked this question more than any other. This blog post aims to give some perspective on this issue for a sole trader. Each business is individual and may not be as simple as the examples give. With that in mind this post should provide some food for thought.
If you have a business issue or questions just get in touch at [email protected] and I will address them in a future blog.
Here is some guidance on what you need to consider when setting up a new business & the tax implications.
1. Irish Revenue assesses taxable income under a number of cases or categories. For a sole trader this is under Schedule D Case I/II.
2.You pay tax on your taxable profits and not on the sales you make. This is (sales minus all the allowable expenses but excluding non allowable items). E.g. personal expenses, depreciation.
3. For some new business this could mean making a loss in the 1st year. If so the loss is carried forward to offset against future profits, or offset against other taxable income E.g. employment income Schedule E
4. A single person can earn €33,800 taxable profits which tax is payable @ 20% anything above this threshold you are charged @ 40%
5. You are entitled to a tax credits of €1,650 for a single person,
6. Often a client will have medical expenses on which a credit of 20% can also be claimed.
Here are 2 scenarios for consideration for a single sole trader (PRSI and USC have not been included)
Scenario 1 Scenario 2
Sales €10,000 Sales €30,000
Purchases €3,000 Purchases €3,000
Motor €500 Motor €500
Stationary €500 Stationary €500
Taxable Profit €6,000 Taxable Profit €26,000
Tax @ 20% €1,200 Tax @ 20% €5,200
Less Tax credit €1650 Less Tax credit €1650
Tax Liability €Zero Tax Liability € 3,550
The above scenarios are set up to give some guidance on what you could expect to pay to revenue.
The key takeaway’s are.
You pay tax on taxable profits and not sales made.
Your tax return needs to include all the income you earn, Rent, interest, Etc.
If your accounts year end is in 2015, you will need to file and pay your tax return by 31st October 2016. Otherwise penalties and interest could be charged.
Preliminary tax is also due to be paid, this is a down payment for the following years tax liability.
Tax credits can to be claimed, depending on the client, this reduces the tax liability, Eg single person Tax credit, Medical Expenses Tax credit, Dirt tax credit.
If your tax credit is greater than your tax liability, you cannot get the difference repaid.
A tax refund can only be claimed if you have paid tax to revenue, otherwise the loss is carried forward and offset against income from the same trade.
I hope these simple scenarios’s gives you some guidance for any new businesses who are wondering about what they will be taxed on.
Got a question drop me a email [email protected]