How to reduce the tax burden for your sole proprietorship?
June 2024 - The sole proprietorship is and remains by far the most popular business form for start-ups. Unlike a company, you and your sole proprietorship are one entity, with no distinction between private assets and those of your business. The downside of this is that you face a high tax burden in personal income tax, supplemented by surcharges in council tax and social security contributions. Fortunately, you can reduce this pressure in several ways.
Cooperating partner
Do you have a sole proprietorship and are married or legally cohabiting? Then you can pay your partner a salary for the work he or she does in your business. By giving part of your net profit to the collaborating partner, you reduce the tax burden in higher tax brackets. Indeed, the distributed amount is taken away from the highest tax brackets and taxed again in lower brackets with the collaborating partner. Another plus point: the tax-free allowance is again applied to this distributed amount, which provides an additional tax advantage.
Independent helper
This principle also applies to someone you help as a self-employed person - for example, a family member - without being bound by employment contracts. Employing a self-employed helper combines flexibility of deployment with lower remuneration costs compared to a permanent member of staff. After all, you do not pay social security contributions on the salary you give an independent helper. Note: a helper must establish himself as self-employed.
Investments
Do you invest in your sole proprietorship, for example in office equipment, machinery or stock? If so, you should not limit the depreciation of these costs to the number of days you owned the investment. In other words, an investment in December 2024 has the same weight in terms of costs as an investment you already made in January of the same year. This offers interesting opportunities to reduce your year-end profits. Moreover, the depreciation annuity can be doubled even more, as degressive depreciation is also allowed in personal income tax.
Tax credit
If you make the above investments with your own funds, you are eligible for a tax credit. You are entitled to this credit if your own funds in the current year have grown more than the highest growth in the three previous years. In that case, the tax credit amounts to 10% of the difference between the equity in the investment year and the highest amount from any of the three previous years, with a maximum of EUR 3,750. You must eventually repay the tax credit. Are you a self-employed person starting out for less than three years? Then the same rule applies, but calculated based on the growth of your equity in the relevant taxable period.
Cessation surcharges
Do you permanently discontinue your sole proprietorship and realise capital gains on (im)tangible fixed assets? Then these can be taxed at 10% in the following cases: when the cessation takes place at the age of 60 or older, on death or in case of forced permanent cessation. For discontinuation at any other time, you have to take into account a tax rate of 16.5% applied to tangible fixed assets and 33% to intangible fixed assets (provided the requirements of the ‘4x4 rule’ are met).
For your information, the 4x4 rule means that you are going to compare the cessation gain you make on such intangible fixed assets with the sum of the net gains you made in the four years before the cessation.
Do you use the asset (e.g. a property) for private purposes for several years after the cessation before selling it? Then the capital gains realised will no longer be taxed. Capital gains realised during the duration of the sole proprietorship on tangible fixed assets owned for more than five years will also be taxed at a rate of 16.5%.
