DANIEL BAINES: Tax and expenses basics for business owners and individuals
A business deducts expenses and then pays tax, whereas an individual pays tax and then expenses are paid with after-tax money
The tax treatment of income in a business is very different to that of an individual in salaried employment. The general rule for a business is that expenses "reduce" income received and tax is paid on the reduced amount of income, whereas for an individual, income is received after tax has already been paid and then expenses are paid — that is, a business deducts expenses and then pays tax, whereas an individual pays tax and then expenses are paid with after-tax money. Note that a business owner may not deduct personal expenses through his or her business — only certain business-related expenses are allowed to be deducted. The effect of this is best illustrated by means of examples. Example 1 - Tax paid by a business • Income - R200,000 • Deductible expenses - R50,000 • Profit (taxable income) - R150,000 (tax is paid on the profit or "taxable income") •Tax at 28% - R42,000 (R150,000 x 28%) • After-tax profit - R108,000 In this example the business would pay tax of R42,000 on a prof...
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