Personal Finance

Your firm must walk in tandem with taxman

money

One of the things that can significantly impact the strategic planning of family businesses is tax. FILE PHOTO | NMG

Some of the most successful businesses globally started out as family businesses and they have evolved over time to become formidable forces globally. Closer home, in Kenya we also have family business that have been a success story.

Running a family business can be a complex task because it requires one to balance the expectation of family members while still steering the business towards success. At the onset you will find that most family businesses will majorly involve family members in the running them. However, as the business grows, it becomes necessary to hire people with certain competencies to lead the business into the future.

One of the things that can significantly impact the strategic planning of family businesses is tax. When making decisions on investment, financing or expansion it is important for family business owners to consider the tax impact of the decisions at the start. This approach enables the business to take advantage of any tax planning opportunities that may exist, enhance its compliance level and therefore reduce the risk of possible tax exposure in the future which may be quite costly.

Some of the considerations are, as the business diversifies its streams of income, how are these incomes reported for corporation tax? The Income Tax Act requires that profits from specified sources of income should be computed separately. Consequently any losses from a specific source of income should only be deducted against future gains from that same source of income. For example, a family business generates revenue from rental income and farming, these two streams of income and their related expenses should be reported separately for tax. Therefore, the business should not be tempted to offset a loss on farming income against a profit on the rental income.

Requirement under the taxation laws sometimes pose a challenge to family businesses and especially those that have not been able to clearly have a demarcation on what concerns family and what concerns the business. One of the requirement when determining the amount of corporation tax to pay, is to deduct only expenses that are wholly and exclusively incurred in generation of business income. Sometimes in family businesses, you will find that the business bears both personal and business costs. Personal costs of family members should not be deducted against the business income as this was not used to generate business income.

The writer is a senior tax Manager with EY.