Two businesses? And only one is making a profit? Use this escape hatch to pay less tax
You may think your only option is to close down the company that isn't making a profit. But don't be too hasty with your decision.
There's an escape hatch you can use.
Let's see if you qualify for it and how you can use it to pay less tax and save this company from closing down.
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What is the escape hatch?
It's a sneaky way of getting out of paying tax on an unprofitable company. But only if you're a sole proprietor or a salaried individual and have some extra businesses (not CCs or PTYs) on the side.
You can offset the profits from one business to the other to cover its losses (Section s20 of the Income Tax Act).
Say for example, you're an accountant but you also have a security business on a part-time basis.
The security business isn't doing well. So you use the profits you make from accounting to offset the losses your security business makes.
This lowers the tax you have to pay.
This is because, on your tax return, you'll have all the income reflecting as one amount.
So if one company is running at a loss and the other one is making profits, your net income will be lower. This will put you in a lower tax bracket, and will then save you money.
Now that you know what the escape hatch is, let's see if you qualify for it…
How to qualify for the escape hatch
To qualify you must show the following:
Read on to see if you still qualify for the escape hatch.
Your trade is a business, not a hobby (something SARS classifies as a suspect trade) nor a tax-avoidance scheme (The Practical Tax Handbook will show you how to see if your trade is really a business in more detail. Claim your risk-free copy here to find out more);
There's a good chance your trade will make a profit; and
You'll be able to make profits in 6 out of 10 years.
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Your trade must make a profit
You must be able to prove your trade will make a profit. If you can't, you won't qualify for the escape hatch.
You must make profits in 6 out of 10 years
The escape hatch won't apply if you incur six years of losses during the previous 10 years of assessment. This includes the year at issue before you take into account any balance of assessed loss you carry forward. This limitation is the '6 out of 10-year rule'.
For a detailed practical example of how to do this, get your copy of The Practical Tax Handbook now.
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