Too Much Profit - Part Two

That is to say, look at the cash flow aspect of the transaction.

Billing your customers for products/services not delivered yet.

For services, you should only recognise the percentage of job completed. You should also accrue for costs (%) that has not been incurred directly related to the job.

In accounting, you should only invoice your customers when you have delivered your products. However, a lot of businesses invoice their customers before delivery because the invoice acts as a confirmation of sorts or a "notice" to get customers to pay before delivery.

This leads to uncertainty to the profitability of the transaction.

1. What if the customer doesn't pay?
2. What if the customer changes its mind and either cancel the order or amend (downwards) the amount billed?
3. What if the cost of the supplying the product goes up and is no longer profitable?

So what should you do?

1. Only invoice a customer backed by a purchase order or a signed agreement.

2. Remember to accrue for the cost, even though your supplier has yet to invoice you.

3. Remember to hedge against any foreign currency fluctuations.

4. Any disagreement in regard to the transaction should trigger a provision for doubtful or bad debt.

5. Go through your customer statements and identify bad pay masters, issue credit notes for returned goods, damaged goods or discounts that you have to give.

End of Part Two

Too Much Profit? Part One

Too Much Profit?

What sort of business doesn't want to show a huge profit at the end of the year?

A business that doesn't want to pay taxes? A business that doesn't want to pay its shareholders? A business that doesn't want to pay out a bonus?

Well, the list goes on...but like everything else, we are missing the KEY reason why a large profit isn't so platable to management or its owners.

A large (or significant) profit does not necessarily mean a healthy business. It could just be the following:

1. More orders in the last month of the year
2. Fixed assets has been fully depreciated
3. A large inventory at the end of the year
4. Exchange gains during year end translation
5. Waiver of amounts due to directors/other creditors

That just means PROFIT IS NOT EQUAL to GOOD POSITIVE CASH FLOWS.

However come tax reporting you are being taxed on your profit cash items or otherwise.

It is therefore important to look at the accounts and see if you are booking in profits that are either non-existent or uncertain.

End of part one

Private Car - Part Two

Employee claim

Can you expense off petrol claims made by your employees as a tax deduction? Answer is NO.

How do you structure these claims?

1. Pay a fixed transportation allowance: IRAS will allow this tax deduction, however, you have to pay CPF on this allowance. Your employee will be taxed on this allowance.

2. Get your staff to take a public transport.

3. You can purchase a business vehicle - G plated vehicles. Why?

a. You can claim petrol, repairs and other related expenses. (except for fines & summons)
b. You are given a capital allowance deduction.
c. You can advertise your company on your business vehicle
d. You need not pay CPF and your employee is not taxed for using the vehicle.

4. Contract out a chauffeur position.

a. Save you the driving, gives you more time to prepare for your sales meeting.
b. Expense off this service received and get a tax deduction.
c. Move the maintenance of a car and driver to another person.

Leave the car in the garage/car park

IRAS clearly states that ALL expenses for S-plated vehicles are NOT tax-deductible. That means no deduction for petrol, repairs, parking etc.

You MAY claim petrol expenses from your company, it is allowed, it is however NOT allowed for income tax deduction.

For example,

Net loss (S$6,000) (Out of which $8,000 is for your car)

Add back:
Upkeep of motor vehicles S$8,000

Adjusted profit S$2,000

Tax approximately S$200

Therefore, it is tax wise better to take a taxi, as you are able to claim every single cent.

Again, this has to depend on your overall expenditure on your vehicle (hire purchase instalments, petrol, repairs, parking, depreciation....)

See Part two to deal with employee claims.

Director's fee

Many auditors and tax agents advise Director's to accrue for directors' fee to reduce the profit that is to be taxed at corporate rates.

There are several considerations before using this technique.

1. You have to know your personal income OTHER than those from your company. What is your effective tax rate?

Example,

Corporate tax rate: 20% BUT for the first $100,000, the effective tax rate is about 10% So any other personal income HIGHER than 10% , directors' fee should NOT be declared.

2. Should you declare bonuses before declaring directors' fee?

Example,

Assume that your have $50,000 to be distributed and you DO NOT want to pay taxes at corporate tax rates.

If you declare $50,000 as director's fee - tax is S$1,750
(Assuming no other income and without calculating for tax relief)

If you declare $50,000 as a bonus - tax is S$900

You save - S$850!! Why?

When you pay bonuses, you will be given a relief for the 20% CPF that is deducted from your bonus.

Therefore,

Income - S$50,000
Less:
CPF - S$10,000 (20%)

Chargeable income - S$40,000

First S$30,000 S$350
Next S$10,000 S$550
Total S$900

This example does not take in the consideration that CPF is payable for the bonus by the Company. This will reduce the corporate profit FURTHER.

Plus, it will increase your NON-taxable income (CPF of 20% and 13%)