A sole trader is a business with only one owner. This means that the firm has no other owners who are publicly traded entities or companies, either local or international. As there are no other owners of the enterprise, these can be ignored as they do not impact the workings of the business. However, the sole trader owner will need to deal with all matters such as taxation and legalities as outlined in this article.
Sole traders include those who run gift shops, market stalls, artisans, and tradesmen such as carpenters and plumbers. It also has professional people such as doctors and lawyers who operate their practices rather than employees of a company.
Taxopia’s sole trader tax returns are more complicated than those of limited liability companies. This is because the sole trader has to deal with their income and expenses and claim certain tax deductions.
A sole trader can claim deductions for business-related costs, such as the depreciation of assets used in the business, which are claimed over some time on his tax return. However, the taxpayer must be able to show evidence to substantiate these claims.
Expenses that cannot be claimed against tax include entertainment, food, and drink consumed by self or employees during working hours, personal travel between home and work, private expenditure on tools or equipment bought solely for personal use, salaries paid to family members, including company directors unless they carry out an active role in running the company. These expenses are personal and are not claimed against tax.
Expenditure on assets used personally and for business purposes, such as a car, must be apportioned. If the asset is used primarily for business purposes, it can be depreciated fully against taxable income. However, if used primarily outside the business, only the time spent for work purposes will be allowed as a deduction.
Each sole trader’s situation varies depending on factors such as turnover, amount of deductible expenses, property owned, etc., so it is best to seek expert advice when doing your tax return.
You should note that where a sole trader carries out his profession in partnership with another person or other people carrying out the same professional business, then any income from this partnership is taxed like a general partnership. That means that the business’s net profits are divided between all partners according to a percentage agreement, and each partner pays tax on their share.
Each case will be treated individually, so it is best to seek advice from an expert in this matter. This applies even where the sole trader has no other occupation but has rental property income, shares, or bank interest, as these need special attention and care to avoid expensive mistakes.
Tax returns for sole traders can be complicated and must be done correctly. If you need help with your tax return, you should seek expert advice from a qualified accountant or taxation specialist.