How To File Income Tax For Your Side Business
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For many people, starting a side business often marks the start of their entrepreneurial journey, with hopes that they can eventually grow their business into an established brand. It is also a way to supplement their existing employment income. And with the rapid growth of the gig economy, digital platforms, and various incentives from the Malaysian government, it is now easier than ever for individuals to give entrepreneurship a try.

That said, having a side business also means that you’ll need to declare and file taxes for the income that you’ve earned from it. If you’re someone who is running a side business on top of earning from a formal employment, you may have some questions as to how to do it. Read on to find out!

What is defined as a side business?

For this article, side businesses are defined as secondary enterprises that you run when you already have a prior commitment, such as a day job or a primary business. They can be registered with the Suruhanjaya Syarikat Malaysia (SSM) – whether as a sole proprietor or partnership business – as doing so will entitle you to some tax incentives that are inaccessible to taxpayers with non-business income. Examples of side businesses are plenty, including online stores on e-commerce platforms, blogging, content creation services, and so on.

Which form should I use?

Assuming that you are registered with the SSM as a sole proprietor business, you will need to use B form when filing your taxes. This is because you are now carrying on a business enterprise rather than the occasional freelancing.

Meanwhile, if you did not register your business, then use the usual BE form (for those with non-business income) to file your tax as a freelancer instead. In this form, you will be able to declare your side income under “Statutory income from interest, discounts, royalties, pensions, annuities, other periodical payments, and other gains and profits.”

To clarify, “…other gains and profits” is defined as payments received for part-time or any broadcasting, lecturing, writing, and other jobs that you take up occasionally. So if your side income falls under any of these categories, you can declare it in your BE form as it does not technically count as carrying on a business.

What are some of the information that I need to prepare for the tax filing process?

If you’ve checked out the B form, you’ll notice that it bears some similarities to the BE form – which means the tax filing process for a side business may not be as different as you think it’d be. That said, some additional key information that you must now also prepare include:

  • Statutory income from all businesses and partnerships
  • Statutory income from employment
  • Current year business loss
  • Business losses brought forward
  • Gross and allowable business expenses
  • Capital allowances of business

In preparing such information, take care to note some crucial specifics, such as the difference between gross income from business and adjusted income from business source – and how to calculate each one.

Gross income from business, for instance, includes revenue from the sale of your goods and services, money that your customers owe to you for the rendering of your services, as well as recovery of bad debts. Adjusted income, on the other hand, is derived after the deduction of business expenses from your gross income. Examples of these business expenses are allowable business expenses, allowable specific expenses, and export allowances.

Additionally, if you are involved in e-commerce and are uncertain about the tax treatment for different e-commerce business models (including domestic and overseas businesses), here’s a guideline from the Inland Revenue Board (LHDN) to help you out. It lists out the various characteristics that an e-commerce business should meet in order to be subject to Malaysian tax.

What kind of tax deductions and incentives am I entitled to?

As a registered business owner, you will be entitled to a number of tax deductions and incentives on top of the individual tax reliefs that you can also claim. Here are two main deductions that you can tap into as a side business owner:

Business expenses

The deduction of your business expense will help to lower the gross income earned by your side business, and by extension, reduce the amount of tax that you need to pay. Here’s a table provided by LHDN that clarifies what falls under allowable business expenses, and what does not:

Further examples of allowable business expenses include commissions, bad debts, travelling and transport, repairs and maintenance, as well as promotion and advertisement. As a side business owner, you will be likely to claim the following as your business operating costs:

  • Purchase and maintenance of equipment (e.g. laptops, camera gears, printers, and home office setups)
  • Office supplies (e.g. printing papers and toners)
  • Computer software for work (e.g. editing and analytics software)
  • Transport, fuel, vehicle, and travel expenses (e.g. toll fees, meals, and accommodation expenses)
  • Training and education (e.g. workshops, coursework, and conferences)

Note, though, that your business-related deductions and personal reliefs must be clearly distinguished and claimed under the right category. For instance, a computer bought for your personal use cannot be claimed as a business expense; it has to be claimed under the tax relief allocated for lifestyle.

Capital allowance

LHDN states that capital allowance is provided as a “deduction from business income in place of depreciation expenses incurred in purchase of business assets”. In other words, it accounts for the depreciating value of certain assets that you need for your business. Examples of such assets include motor vehicles, machines, office equipment, furniture, and computers.

Additionally, the capital allowance is rated according to types of assets, and can be claimed according to the following arrangement:

What are the tax rates like for a side business owner?

The tax rates applied to a side business owner is the same as the one used for taxpayers with non-business income. It will be applied to your chargeable income, which is obtained after deducting all your business losses, allowable expenses, approved donations, and individual tax reliefs. Depending on the range of your chargeable income, the tax rate may fall between 0% to 30%, as per dictated by LHDN:

Chargeable income (RM) Calculations (RM) Tax rate (%) Tax (RM)
0 – 5,000 First 5,000 0 0
5,001 – 20,000 First 5,000

Next 15,000

 

1

0

150

20,001 – 35,000 First 20,000

Next 15,000

 

3

150

450

35,001 – 50,000 First 35,000

Next 15,000

 

8

600

1,200

50,001 – 70,000 First 50,000

Next 20,000

 

14

1,800

2,800

70,001 – 100,000 First 70,000

Next 30,000

 

21

4,600

6,300

100,001 – 250,000 First 100,000

Next 150,000

 

24

10,900

36,000

250,001 – 400,000 First 250,000

Next 150,000

 

24.5

46,900

36,750

400,001 – 600,000 First 400,000

Next 200,000

 

25

83,650

50,000

600,001 – 1,000,000 First 600,000

Next 400,000

 

26

133,650

104,000

1,000,001 – 2,000,000 First 1,000,000

Next 1,000,000

 

28

237,650

280,000

Exceeding 2,000,000 First 2,000,000

For every next ringgit

 

30

517,650

………………

Steps to help with an easier tax filing process

The tax filing process can sometimes get complicated, especially when you start earning a significant amount from your side business or if you have not been keeping proper track of your business documents. Here are a couple of measures that you can take to ensure an easier tax filing process.

Good bookkeeping practices

Keep a clear record of your business income and expenses throughout the year by filing your invoices, receipts, and bank statements properly and promptly. You can use a basic Excel document to help you with this, or even subscribe to an accounting service to do so. If you want, you may even draw up proper profit and loss (P&L) documents and balance sheets to assist you. Whichever method you prefer, be sure to log these details systematically and according to date so that you can easily refer to them when filing your taxes.

On top of that, remember to keep all your receipts and invoices for a period of seven years, as is required by the Income Tax Act 1967.

Open a business bank account

While not strictly necessary, it may be a good idea to open a business bank account so that you can keep track of the cash flow of your business. This way, you can keep your business income and expenses separate from your personal finances. Moreover, a separate bank account may also contribute to an easier and better bookkeeping process as you can use your account statements to crosscheck with your invoices and receipts.

Not only that, some business bank accounts may also offer certain promotions and benefits to you, such as business loans with lower interest rates. It would be wise to shop around a little to check for such perks.

***

We hope that this guide has helped to clarify some questions that you may have as a side business owner who is filing your taxes. If you have other tax-related concerns to clear up, do also check out our step-by-step income tax guide for 2021 (YA2020) here. Additionally, we have other income tax content available for your reference, such as information on the tax reliefs that you can tap into this year, filing your taxes for the first time, and the special tourism tax provided for your hotel stays last year.

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