Entrepreneurs willing to invest a fortune to save income tax is what we come across daily. Is this placing the horse behind the carriage?
Entrepreneurs willing to invest a fortune to save income tax
As the calendar year progresses some entrepreneurs see their profit growing. Initially joy comes across their mind, but if you mingle a lot with native Dutch, the tax impact result could darken your happy thought. Statements like: “you probably pay half to the tax man”. Or “why work so hard if the lot goes to the Government”.
Do I pay too much tax, you think
We have tax brackets in the Netherlands. Officially two, but actually three. The one you do not see is the social premium bracket. The low bracket of the two goes to about 38% income tax. The moment you start to earn a profit exceeding roughly EUR 70.000 you pay over that excess 49,5% income tax.
Before the entrepreneur gets to these taxable profit amounts, the company profit is reduced with tax credits. The entrepreneurs credit, starting entrepreneurs credit and small business credit. Then if the company makes investments and criteria are met, then 28% of these investments also result in an additional credit.
How to reduce the taxable profit even more
This is the question we receive a lot. Then we learn the entrepreneurs willing to invest a fortune to save income tax is the matter. When these investments are necessary for the company anyway, this is perfect. If not, then not.
Example
The company is expanding and a EUR 10.000 desk is required. The desk is purchased on December 1. The entrepreneur that actually needs the desk, purchases the desk. The entrepreneur that not necessarily needs a desk contacts us. “Will my profit be reduced with the investment of EUR 10.000 in a desk”.
Yes it will. The desk is an investment for which in the income tax return an additional 28% over EUR 10.000 can be deducted. The desk being an investment also implies it needs to be depreciated over a 5 year period. From experience I can state the desk has no more value after being used in the office in 5 years time, hence no rest value. That implies a EUR 2.000 depreciation per year. In the year of purchase the deprecation is only for 1 months, as the desk was purchased on December 1. That implies a EUR 167 reduction of the profit.
Entrepreneurs willing to invest a fortune to save income tax
Spending EUR 10.000 in costs only to pay less tax results in EUR 167 lower profit. This is silly if the company does not really need the investment. The investment was only made to reduce tax. If you need an instant reduction of the profit, you should not make investments, but costs. Costs are expenditure less than EUR 450 excluding VAT. These reduce the profit instantly.
If you make EUR 450 costs, the tax you save is either EUR 171 (38% tax rate) or EUR 223 (49,5% tax rate) it is like putting the horse behind the carriage.
Why not aim to pay more tax?
The saving costs to make more profit is a managers philosophy. We know entrepreneurs as individuals that prefer to spend more on advertising to make more profit. Pay more tax.
Making an investment to create more turnover is not only about paying more tax. Increasing the result implies genuine investments can be made. Investment such as more staff, bigger office, more exposure. That leads to even more result and indeed more tax. The more you earn the more you can spend.
Tax is exciting
We think tax is exciting. We will be excited to explain to you which costs are tax deductible. More exciting is to support you in getting the best out of the entrepreneur to yield a higher result.
