Where a person is trading as a sole trader and not incorporated what is the situation regarding what the owner pays tax on. Does he pay income tax on the profit of the business plus any withdrawals/drawings he has taken from the business during the financial year? Or is the profit on the business treated differently from the owner's drawings?
As a sole trader, he pays tax on the profits alone. What he takes out as drawings etc is irrelevant.
I would disagree with dbran on this one, drawings are also taxable as this is effectively a source of income.
any drawings would be an add-back in the tax comp (thus increasing your case 1 income) so little miss is right. they would be taxable as they are not a trading expense of the business
Drawings are not an allowable expense so disregarded in calculating profit. So tax is calculated on income less allowable costs and expenses. That is what Dbran was saying.
Drawings normally cash won't hit the PL so like dbran said it's disregarded.
If it's personal expenses nothing to do for the business it should not be left hanging in the PL. If it does stay in the PL, it'd be an add back in the tax comp being expenses not deductible for tax purposes.
Anyway i don't see any point leaving these expenses in the PL to make the profit looks healthier.
A sole trader will pay tax on the profits of the enterprise (after adjustments for items like Depreciation & Capital Allowances) there may be other adjustments to the profit figure (disallowing personal elements of Motor running costs etc) depending on the individuals circumstances.
A sole trader would also be eligible (nice how the Revenue frame it) to pay tax on all other income earned in the year, Company Dividends, Rent, Bank Interest, Credit Union Dividends etc., much like any other person is meant to.
Dbran is correct. Tax is paid on profits earned. Not cash spent. For a small business often the profits earned and the cash spent are similar amounts, but the tax is calculated on the profits. Drawings are not an allowable expenses.
this is the most ridiculous statement i ve heard in while and thankfully people have corrrected it. drawings a source of income? under what tax schedule did you think they were taxed? as the others have said below they are ignored as they go into the balance sheet
I didn't mean a seperate income source from a tax point of view. I simply meant that drawings provide income to the sole trader in the same way as wages etc and as such must be taxed.
They are cleared added into the tax comp as they are not an allowable business expense.
They are not added into the tax comp at all!! unless shown as wages and thus then added back. but showing them as wages is wrong!!!they should be shown as drawings in the balance sheet as this figure needs to be correct as it has to be disclosed under the extracts of the trade to revenue. i suggest you check this up before mis-advising others
I agree with what kennyb3 said. Little Miss, it doesn't make sense what you said there.
back to basic, most sole traders don't pay themselves wages, they take the money out of the bank and it is accounted in the balance sheet i.e. drawing account, not anywhere near the profit and loss nominal.
Little Miss Cutie,
In partnership accounts you may see salary for the partners as an appropriation of profit. This gives a more meaningful comparison of accounts to a set of ltd company accounts, and may also be used to reflect the different experience levels of the partners etc. This is common place in solicitors and accountants partnership accounts.
The captial account in the balance sheet will reflect these salaries, if any and drawings.
To calculate the taxable profit, the partner’s salary will be added back in the adjusted profit computation.
To add drawings into the tax comp assuming you are preparing an adjusted tax comp in the first place would effectively double the amount of profit the person is paying tax on.
DRAWINGS do not go near the tax comp. Listen to what you are being told. If you are unsure and still find this hard to understand PM me and I will go through this in detail with you.