A choice for self-employed income taxpayers
The filing deadline for the 2017 individual income tax return is fast approaching ie March 31, 2018. One of the key changes to the personal income tax regime, which is effective from the 2017 tax year onwards and which will impact self-employed income taxpayers, is the reduction of the standard expenses deduction. While the recent changes in law increased the standard expenses deduction for employment income taxpayers, the opposite is true for self-employed income taxpayers where the new law provides for a reduction of the standard expenses deduction.
In 2016 and prior years, self-employed income taxpayers were entitled to claim the standard expenses deduction up to 85% of their income. With effect from the 2017 tax years, the standard expenses deduction is now limited to 60% of income. On the upside, however, taxpayers with self-employed income may elect to rather itemize and claim the actual expenses incurred during the tax year. This would be beneficial where the actual expenses incurred exceed the standard expenses deduction.
Although there is no limit on the amount of itemized actual deductions, taxpayers should be aware that the rules and conditions for the computation of net taxable profits for corporate income tax purposes shall apply in determining the deductible expenses. That is, taxpayers must maintain the supporting documents which evidence and support that the itemized deductions are in accordance with Section 65 bis and 65 ter of the Thai Revenue Code (“TRC”). Section 65 bis of the TRC stipulates the conditions for the computation of net taxable profits, such as the methods for calculating depreciation and inventory. Section 65 ter of the TRC on the other hand, lists disallowable expenses in the computation of net taxable profit.
Due to the significant reduction in the standard expenses deduction, the option of claiming the actual expenses may be more beneficial for self-employed income taxpayers. The election must be made in the annual tax return and once it is filed, the decision cannot be changed. Therefore, if the tax authorities conduct a tax audit and the taxpayer cannot furnish evidence to support the deduction of certain expenses, the taxpayer would be subject to additional income tax plus a monthly surcharge of 1.5% on the amount of additional income tax due. During the tax audit the taxpayer cannot revert back to the standard deduction method if the audit results in the itemized deduction being less than the standard expenses deduction.
To ensure taxpayers make the correct decision in their 2017 tax returns, it is important that a calculation be prepared comparing the standard expenses deduction and the itemized actual deductions to determine which method is more beneficial. Equally important is for taxpayers to consider and review whether the itemized expenses are within the definitions prescribed by the TRC and can be properly evidenced and supported. Now more than ever, it is recommended that taxpayers maintain supporting documentation at the time expenses are incurred.
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