In Hong Kong, you pay corporate tax or profits tax on your company’s assessable profits. This figure isn’t necessarily the same amount of profit as you see on your corporate balance sheet. Instead, you need to go through a number of calculations to work out the exact taxable income for your company. Here’s a breakdown of that process.
Calculate Your Net Income
First, you need to determine your company’s net income. When calculating income for small businesses or corporations, you should include the following:
- Profits you earn from carrying on business
- Royalties from intellectual property rights
- Money received for using film, tapes, or recordings that you own
- Rent from leasing personal property such as machinery or equipment
- Interest earned
- Money earned on bills of exchange
- Funds earned on certificates of deposit
- Grants or other financial assistance your business receives
- Refunds for contributions you’ve made to retirement accounts
There also are some funds you don’t have to count for when calculating your business income. These are called non-assessable profits, and they include profits earned outside of Hong Kong and money you earned selling capital assets. Additionally, if the government has already assessed profits tax on some of your dividends or profits, you should subtract those profits from your taxable income as well. Finally, in terms of interest, you don’t have to count any interest earned on deposits in banks in Hong Kong, but you do have to report interest from foreign deposits.
Deduct Your Expenses
Once you’ve determined how much taxable or assessable income your business has, you get to deduct business expenses from that amount. As a general rule, business expenses include all costs you incur while running your company. That includes rent for office or retail space, utilities, maintenance costs for equipment, research and development expenses, and minor expenses such as office supplies. Typically, you can also include costs you incur while starting up your business.
In addition, you can also claim a deduction for interest and fees on business loans. Because loans are often necessary to run businesses, the government considers the costs associated with obtaining loans to be an expense. You can also count taxes paid to foreign governments and payments for patents, trademarks, and copyrights.
If your business made any charitable donations, you can also write off those amounts as business expenses. And, you should subtract bad debts as well. Bad debts happen when you count an unpaid invoice as income on your tax return, but then, your client never pays the invoice so you write if off as a bad debt on the following year’s income tax return. Note that you cannot include personal expenses as business expenses. The costs have to be incurred in the pursuit of earning profit for your business.
Subtract Unutilized Losses
Normally, when your business has losses, you subtract the losses from your business income. That reduces your income on paper and helps to lower your tax liability. But if your losses exceed your business income in a particular, you can’t use those losses, and by extension, they become unutilized losses. If you have unutilized losses from previous tax periods, you can subtract them from your assessable income.
Take Away Your Capital Allowances
When you make a significant purchase for your business, you can’t write it off like you would a routine expense. Instead, you need to depreciate the expense slowly over time. This means that you write off a bit of its value every year until you have claimed the whole amount.
Luckily, with most capital expenses, you get to write off a fairly sizeable chunk in the year of purchase and then a smaller amount every following year. For instance, if you spend money constructing a building, you can write off 20% of the expense in the first year. Then, you get to write off 4% of the cost for the next 20 years or until you sell the asset. With plant machinery or equipment, for example, you get to write off 60% of the cost in the first year. To ensure you subtract the correct amounts, you may want to work with a small business accountant or use tax prep software designed for corporations.
Add in Balancing Charges
If you sell any capital assets, you may have balancing charges. And if so, you need to add these amounts to your business’s taxable income. To calculate your balancing charges, take the amount for which you sold the capital asset and subtract its written-down value. The written-down value is the original cost of the asset minus any capital allowances you already claimed on behalf of that asset.
To explain, imagine that you have a piece of equipment that you sold for HK$600,000. Originally, you bought the equipment for HK$700,000 and you claimed HK$200,000 in capital allowances over the years. That makes the written down value HK$500,000. That is HK$700,000 minus HK$200,000. Because you sold the asset for HK$600,000, you have a balancing charge of HK$100,000. This gets added to your corporate taxable income.
To keep track of your tax calculations, you need the right software. That’s where cloud-based accounting software like QuickBooks Online comes in. This intuitive program helps you track all your business income and expenses, making it easier to prepare your forms at tax time.