Corporate vs. Single Ownership of Cafés

During last month’s income taxation period, I came out with some blog articles about the allowable expenses in computing the income tax due on an individual taxpayer deriving income solely from business. There are two (2) methods of deducting expenses from which you as a single owner of a  café business can choose in filing your income tax return. The simpler one is the Optional Standard Deduction (OSD) which allows forty (40%) percent of your cafe’s gross sales to be deducted as operating expense.

If availed, OSD would allow the taxpayer to keep records only of his sales . Bookkeeping of expenses, capital investment and depreciation will no longer be necessary. This is in contrast with the itemized deduction methods where the services of an experienced bookkeeper or accountant will be needed to maintain the business’ books of accounts.

Roughly, the OSD method translates sixty (60%) percent of your café’s total sales to be the gross profit of your business. From the gross profit figure, only your personal and additional exemptions are deducted to arrive at your net taxable income.

Translating the 40% OSD and the maximum personal and additional exemptions of PhP150,000.00 if you are a married taxpayer with four (4) legal dependents and deriving income solely from your café , PhP250,000.00 total annual sales will be the benchmark. Any sales in excess of P250k will be subject to graduated income tax which can go from a low of five (5%) percent to as high as thirty-two (32%) percent.

Compared to corporation owning a business such as a café, you, as an individual taxpayer seems to be getting taxed more. A corporation is also allowed to use the 40% OSD but this is applied after the cost of sales is deducted from the gross income (same as gross sales) of the business. In the case of cafés, cost of sales includes the power consumption, DSL connection, salaries and wages of staff and depreciation.

After deducting the cost of sales and the 40% OSD, the resulting figure will be subject to further deduction of selling and administrative expenses before a thirty (30%) percent income tax is applied on its net income. Selling and administrative expenses includes transportation, representation and entertainment, commissions and other incidental expenses necessary for the operation of the business.

The above discussions show that our tax system is very much tilted in favor of corporations versus self-employed individuals which most café owners are. The question now is, should you convert your single-owned café into a corporate-owned entity? How should you do the conversion? I will deal more on this issue in my future blogs. Watch for it!

NOTE: Your comments are welcome here but you may wish to proceed to Café Forum for your questions and comments.