Continuation from: The Importance of Record-Keeping to Your Business
Undoubtedly, another important function of records which is important to every business owner is to keep track of the tax deductible expenses. Without an adequate record keeping system, you will not be able to claim deductible outgoings come tax time – a loss which could be particularly detrimental to your wallet!
Of course, Income Tax laws require a person to keep proper records. Records are a crucial part of any business tax return and are needed to support the income, expenditure and deductions that you claim in your tax return. Typically, these figures will be the same that you use to monitor your business during the year.
Keeping good records throughout the tax year, and not just scrambling to compile documents when your tax return is due (like my friend above), also means that you will have accurate figures available for official examination at all times, which is always a possibility as Inland Revenue Board tightens up their approach to tax audits. A common mistake made by business owners is to report based on an estimate of the income and expenses in their tax returns. These types of returns are always subject to hefty additional taxes and fines when come to a tax audit.
As a small business owner, you must be aware of the possible tax deductions that are available to you that can save you a lot of money every year, instead of unnecessarily paying them to the tax authorities.
By simply keeping good records, you may derive thousands of ringgit in tax deductions that would otherwise not be possible. Even if these deductions result in a current year business loss, they may be used to reduce your other personal taxable income, or carried forward and utilised against your future years’ business taxable income.
If you already have a tax accountant, please do not think that they already know all the deductions that you are entitled to. Your tax accountant may not understand your nature if business in detail enough to advise you of all the deductions that are available to you. Who else, but YOU, would be in the best possible position to know your business and determine the deductions that are available? Besides, your accountant will only be able to submit claims for business expenses which are substantiated. So the responsibility of making sure those documents are available as a result of good record-keeping, would still lie with YOU.
Under the current self-assessment tax regime, you are responsible for reporting your own income and making the necessary claims for deductions in your annual tax return. However, any under-reporting of your income or over-claiming of expenses (by virtue they are not business-related, or unsubstantiated) will result in penalties of up to 45% of the tax undercharged when comes to a tax audit. That’s why I can’t stress enough why good record-keeping is important.
A client of mine had just received a letter from the Inland Revenue Board, requesting for documents and records relating to his recent tax submission, as part of the standard tax audit process. After vetting through the documents from which his clerk prepared his financial statements, we realised that numerous documents for claims for tax deductions are not in the stack of documents given to us. Apparently those records were not kept properly and consequently misplaced. We quantified that due to this mistake by his clerk, his additional exposure to taxes and penalties as a result of unsubstantiated claims for tax deductions will cost him several thousand ringgit. That’s an expensive mistake, by any standard!