Understanding Taxes for Your Small Business (part 1)

Your FAQs Answered - Income Tax

My last article explored the expenses a small business can claim when calculating their taxes. I want to shift my focus to the taxes themselves.

Knowing the ins and outs of the different taxes your small business might encounter is more than just financial wisdom. To me, it's a strategic advantage. Acquiring this knowledge provides you with the tools to plan your finances effectively, set aside the right amount for tax payments, and, importantly, minimize your tax liabilities while steering clear of penalties.

Believe it or not, being tax-savvy can be a game-changer for your small business. It goes beyond compliance….thinking about it 🤔… it’s more about strategic planning and operational effectiveness.

In today's article, I highlight the four fundamental types of taxes that could impact your small business. Whether you're a solo entrepreneur or a limited liability company, my goal is to answer the frequently asked questions about income tax, corporation tax, business levy, and green fund levy.

When all is said and done you should be in a better position to navigate the tax terrain yourself or decipher whether the advice someone gives you is sensible.

Let’s begin with income tax.

What is income tax?

Answer: Income tax, or personal income tax, is levied on all income earned by individuals, whether from salary or self-employment.

As a sole trader, is it true that I only pay tax on income earned from the business?

Answer: Not quite. According to the Income Tax Act, tax is charged on all income earned, including profits from trade, business, vocation, profession, employment, short-term capital gains, royalties, rents, fees, commissions, dividends, and interest.

What is a short-term capital gain?

Answer: A short-term capital gain is the profit from disposing of an asset acquired within twelve months of its acquisition.

Is there any income exempt from Income Tax?

Answer: Yes, several exemptions exist, including dividends from resident companies, cooperative societies, or Unit Trusts to resident individuals, and interest earned by residents on various savings accounts with banks and financial institutions.

I have an e-commerce business with funds going overseas. Do I still pay taxes?

Answer: Yes, as a resident of Trinidad and Tobago, all income, regardless of where it's earned or remitted, is subject to Trinidad and Tobago taxes.

What is the income tax rate?

Answer: The income tax rate is 25% on chargeable income under TT$1 million, rising to 30% on any excess.

What does chargeable income mean?

Answer: Chargeable income is the difference between your total income and allowable business expenses as a sole trader.

If my business expenses exceed taxable income, do I still pay income tax?

Answer: No, you won't pay income tax. However, the business levy tax may apply in a loss position.

What is business levy?

Answer: Business levy is a tax on gross sales and receipts, charged at 0.06%, applicable if sales are over $360,000. Exempt for the first three years of business.

Do I pay both income tax and business levy as a sole trader?

Answer: No, you pay the higher of the two—either income tax or business levy.

When do I pay taxes as a sole trader?

Answer: Tax is payable quarterly (March, June, September, and December). All balances must be settled by April 30th after the income year to avoid a 20% interest.

As a business owner who is also employed, what documentation is required for filing my Personal Income Tax return?

Answer: If you're salaried or receiving a pension, a TD4 from your employer and Financial Statements for your business are crucial for calculating chargeable profit.

Is it mandatory to include my BIR number in communications with the Board of Inland Revenue?

Answer: Absolutely. Including your BIR number on all documents and communications is imperative for smooth dealings with the tax authorities.

Can I offset losses from one year against profits in another as a sole trader?

Answer: Yes, the Income Tax Act allows for the carry-forward of losses, helping to offset future profits.

As a sole trader, can I deduct my home office expenses for tax purposes?

Answer: It's a bit tricky. While there's precedent for deducting a reasonable portion of home office expenses—like utilities and rent—as business expenses, it's not explicitly outlined in the Act.

Are there any specific deductions or allowances for sole traders?

Answer: Absolutely. Sole traders can claim all expenses wholly and exclusively incurred for the business, in addition to personal allowances and other concessions.

Exploring taxes might seem a bit like wandering through a new neighborhood in the dark alone but I hope the Income Tax FAQs have made things a bit clearer for you.

“Ignorance is a costly companion for a sole trader. Having even a fraction of tax knowledge can be a powerful asset. Your understanding today is an investment in a more informed and financially savvy tomorrow.” – Melissa Cobham

The views reflected in this newsletter are those of the author and do not necessarily reflect those of Aegis Business Solutions, its partners, or any affiliated companies.

If you found value in this article, I'd love for you to share it with your fellow entrepreneurs. Also, feel free to share your suggestions for future topics.

Look out for Part 2, where I'll dive into corporation tax, green fund levy FAQs, and some useful tidbits about tax administration.

Here's to your continued success, and I'm excited for our next conversation 😊

Cheers