There are big tax benefits available to companies that qualify as small business corporations. It is wise to determine whether your business qualifies so that you can take advantage of these reduced tax rates.
There is an extensive list of requirements that must be met before a company can qualify as a small business corporation. Some of the major requirements are:
• The business must be a private company, CC, co-operative or personal liability company;
• The business cannot have an annual gross income that exceeds R20m;
• The shareholders of the business cannot be shareholders in other companies (though there are certain exceptions, including owning shares in a listed company);
• All shareholders must be natural persons, ie individuals; and
• Not more than 20% of total receipts of the business can be investment income and income from rendering a personal service (there are exceptions to this general rule).
The tax benefits to small business corporations are best illustrated by means of examples.
Example 1
Not a small business corporation
Gross income - R100,000
Less deductible expenses - R50,000
Taxable income - R50,000 (gross income less expenses)
Tax at 28% on taxable income - R14,000
Example 2
Small business corporation
Gross income - R100,000
Less deductible expenses - R50,000
Taxable income - R50,000
Tax at small business corporation rates - R0
In this example, the small business corporation has saved R14,000 tax for the tax year.
Example 3
Not a small business corporation
Gross income - R1m
Less deductible expenses - R500,000
Taxable income - R500,000
Tax at 28% on taxable income - R140,000
Example 4
Small business corporation
Gross income - R1m
Less deductible expenses - R500,000
Taxable income - R500,000
Tax at small business corporation rates - R48,370.
In examples three and four, the taxpayer has reduced the amount of tax payable to Sars by R91,630 for the tax year. This is a significant reduction in tax payable.
It must be noted that a personal service provider cannot qualify as a small business corporation.
Besides the reduced tax rates, a small business corporation is also entitled to an accelerated depreciation allowance for certain of its assets.
In order to qualify for the reduced tax rates to which a small business corporation has access, the business must mark on their annual company tax return that they are a small business corporation.
A business must obviously only do this if it is certain it meets all the requirements for it to qualify as a small business corporation and does not fall foul of any exclusions.
Considering the huge potential tax savings, it is recommended that the owners of all businesses that may comply with the above conditions take a closer look at their particular circumstances to determine whether their business can qualify as a small business corporation.
You stand to make substantial savings in your annual taxes if you do.
• Baines is author of How to Get a Sars Refund for Small Businesses and tax consultant at Mazars..