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7 tax-saving tips for small businesses
By Winnie Makena | April 13th 2021
It is tax season and businesses are starting to file all 2020 income tax and information returns. But are there any measures small businesses can take to reduce their tax payments for 2021?
Alex Ndegwa, a corporate and tax lawyer, shares some of the little things you can do to save and still be at peace with the taxman.
1. Keep all the business receipts
With several jargons like tax exemption, tax deduction, tax saving and others to decipher, most of the time we do not even realise what portion of our income is being taxed, and how we can save some money. But there are ways you can save on how much tax you pay.
· Never leave out any cost related to business when doing the math
Your business is going to be taxed on its profits from the proceeds of carrying on the business.
Taxable profit is generally calculated by deducting allowable expenses (payroll, utilities, rent, leases, and other operational costs) from all the taxable income.
If an expense is personal and not used to generate profits that can be taxed, then they are not considered a deductible. Maximising your deductions requires awareness of how you spent your money throughout the year, so keep all your receipts.
·Find out with tax regime best suits you
“A business would need to understand how to qualify for tax regimes that are alternatives to each other. For example, a business may opt to pay turnover tax rather than corporate tax, if it qualifies for the turnover tax regime,” says Ndegwa.
“A tax expert or consultant would assist such a business to understand the qualification requirements and whether the business meets those requirements.”
2. Get a good accounting system
If the tax man comes knocking today, would you show them an organised, legitimate paper trail? If you are a one-man show, you may benefit from getting an accounting software to create invoices, record incoming and outgoing payments, identify and follow up on past due receivables, and run reports that help you analyse your financial health and various aspects of your business.
·For small businesses, check out apps like QuickBooks for business accounting
·Zoho books for really small businesses
·Freshbooks is adequate for invoicing
·Xero if you are a Mac user
(Tracy, if possible, we can put tiny widgets of the apps…just to show reader what they look like)
3. Contribute to charity
Not only does doing charity contributions help you fulfill your social responsibility, but it also provides you attractive tax deductions. Though subject to certain conditions, donations to qualifying charities and for certain public works are deductible.
“For organisations engaged in charitable activities, the Income Tax Act has provisions that excempt them from income tax subject to certain qualifications,” says Ndegwa.
You are also not restricted to donating just cash. Items like clothes, shoes and toys can also go a long way. Be sure to keep receipts and other documentation to back up your deductions.
According to the Finance Act, 2017, If you donate to these organisations, you get a tax deduction.
·Kenya Red Cross,
·Any other institution responsible for the management of national disasters and those working alleviate the effects of a national disaster declared by the President
4. Avoid penalties from late payments
This is one of the ways businesses lose money. If you are in the habit of waiting for the week before deadline to start thinking of filing your returns, you are exposing yourself to unforeseen expenses and will likely miss the deadline. Some businesses go as far as waiting for KRA to extend the deadline which can be disastrous.
·Most penalties for late filing are 5 per cent of the tax due or an amount (usually 10, 000) or whichever is higher depending on what tax your business pays.
·Non-payment of taxes and failure to submit tax returns may prove to be a huge risk for a business and may result in huge liabilities if not
“My advice for every business is that they should engage a tax expert/consultant to conduct a tax health check on the business and ensure that the business has complied and continues to comply with its tax obligations,” says Ndegwa.
5. Hire an accountant
If all this tax talk is making you dizzy, then maybe you need an accountant. If you are starting out with an already small budget, you could hire your kid or your spouse, if they have an aptitude for maths.
If you hire your spouse and offer them health insurance or a small wage, you can deduct those payments on your taxes (see point 1).
However, if your business requires serious bookkeeping, you need a CPA qualified accountant. Their work will not be just preparing financial statements and doing your taxes. They should also work with you throughout the year to track income and spending, to make sure you don’t have a cash flow problem, and to monitor your gross and net profits. It is better to hire one at the start of your business not just during tax season.
6. Hire a tax expert/consultant
If a business is supposed to pay corporate tax, the determination of the tax payable may be different from the accounting calculation which is why you need a tax expert.
Make sure the tax expert you hire helps you understand:
·The tax obligations of the business
·The expenses that are deductible and those that are not, in determining the taxable profit. Failure to understand the deductions may result in either the business paying more tax than it should, or paying less tax than it should which could lead to disputes with the KRA.
·How to determine the tax payable and at what point these taxes are to be paid to the Kenya Revenue Authority (KRA).
7. Identify your business structure
The kind of legal entity you choose for your business determines the kind of tax obligations you will meet. Your business structure can be defined as a sole proprietorship, Limited Liability Company or a branch of a foreign company.
“Because each business is different in the offerings, the tax obligations of each business may vary. For example, a business that only sells goods locally may not be required to pay any import taxes and one that imports goods to sell locally may be required to pay import taxes (if not exempted),” says Ndegwa.
Sole proprietorships are not formally registered as separate entities from the business owner for taxation purposes and so the tax registration of the business owner is the one used for the overall business taxation purposes.
Limited company’s tax is in form of income tax charged at a rate of 30 per cent.
Small and micro enterprises owned by Kenyan residents with an annual turnover of less than Sh5 million are required to pay a presumptive tax. Keep in mind that each business is different in the offerings it provides and therefore the tax obligations of each business vary.
We got in trouble with the tax-man
Duggan Kimani, cofounder of Presta, a pay-as-you-go mobile lending platform
Financial planning is important, something we learnt the hard way. Tax payments almost did us in. A mistake we made with our first company was thinking all the money we made belonged to us until the Kenya Revenue Authority came knocking. Find out what you owe KRA and file your returns.
Stephen Obewo, CEO of Nambole Traders Company
The greatest goof I made was starting off the business without a Kenya Bureau of Standards (KEBs) certification. This led to them seizing our products. I had worked for two months without their certificate. We are now compliant and things have been smoother since them.
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