New Tax Measures for Individually-Owned Businesses Take Effect

The State Administration of Taxation recently issued the revised Measures for the Calculation of Individual Income Tax on Individually-Owned Businesses to ease the tax burden of sole proprietorships, which took effect on 1 January 2015.

According to the State Administration of Taxation, individually-owned businesses and legal-person enterprises currently are subject to different tax laws, with more preferential tax breaks for enterprise income tax compared to individual income tax paid by individually-owned businesses. The revised measures unify the taxable income calculation for the two types of taxes. First, with reference to the difficulty of separating the expenses of the business operation of an individually-owned business from expenses of personal/family living, 40% of such expenses shall be deemed expenses relevant to the business operation and can be deducted. This approach not only enables individually-owned businesses to enjoy deduction but also avoid increase in tax burden due to deduction not allowable in some places for the expenses under the original measures. Secondly, the new measures support individual business owners and employees to take out supplementary pension and medical insurance by allowing pre-tax deduction for the part not exceeding the prescribed standard.

In the meantime, the part of the advertising expenses and business publicity expenses in direct connection with the business operations incurred by an individually-owned business in a taxable year that does not exceed 15% of sales (business) revenue of the current year can be deducted on an actual basis; and any amount in excess thereof can be deducted in subsequent taxable years. In addition, the measures increase the support for research and development (R&D) investment of individually-owned businesses, and lift the pre-tax deduction value standard on a single device for R&D purposes from Rmb50,000 to Rmb100,000.

In addition, the new measures carried out a comprehensive clean-up of the original examination and approval items, cancelling the provisions in having the supervisory tax authorities review or approve items such as capita loss, business entertainment expenses and depreciation of fixed assets.