We are filing our client’s tax returns for 2021 so we are busy saving clients money. These are not the typical tax saving tips you will hear about. Let’s call them alternative tax tips.
Our advice is “don’t do your own tax return” and this is best summed up by a quote from Albert Einstein.
“This is too difficult for a mathematician. It takes a philosopher”
We will look at
- Balancing charge and the replacement option
- PRSI
- Cessation rules
- CGT Losses
- Year of separation
Balancing Charge/Replacement Option
Carpets Carol buys a delivery van for her business in 2016 for €32,000. In May 2021 she sells the van for €15500. She gets capital allowances on the van at 12.5% per annum for the years 2016 to 2020 as follows
| Cost | €32000 |
| Capital allowances 2016 | €4000 |
| Capital allowances 2017 | €4000 |
| Capital allowances 2018 | €4000 |
| Capital allowances 2019 & 2020 | €8000 |
| Tax written down value | €12000 |
| Sales proceeds | €15500 |
| Profit on Sale | €3500 |
In her Tax return for 2021, the profit on the sale is a balancing charge and Carol pays tax on that profit. Her tax rate is 52% so her tax liability on the charge is €1820. But she bought a new van in March 2021 for €30,000. She can reduce the allowable cost of the new van by the balancing charge amount.
| Cost of new van | €30000 |
| Less balancing charge | €3500 |
| Allowable cost of new van | €26500 |
| Capital allowances | €3313 |
The capital allowances on the new van, before deducting the balancing charge, is €3750. There is a reduction in the capital allowances claim of €437. By using the replacement option for 2021 the tax saving is
| Balancing Charge €3500 x 52% | €1820 |
| Less Cap all reduction €437 x 52% | €227 |
| Tax saving | €1593 |
PRSI – Tax saving
The team here noticed a discrepancy with PRSI for some company directors and employees for 2021. Some are a result of the government support schemes and others were on the wrong PRSI class.
In three cases company directors were paying PRSI at Class A rather than Class S. Class S has no employer’s PRSI while at Class A employer’s PRSI is 11%. Class S PRSI is for an owner-director who owns 50% or more of the business and is effectively self-employed.
Dentist Denis runs his dental practice through a limited company and has a salary of €70000. He owns 100% of the company. On review of his employment detail summary for 2021, we see that he paid Class A PRSI for 52 weeks.
| Gross Salary | €70000 |
| Employer’s PRSI 11.05% | €7735 |
At Class S the employer’s PRSI charge should be nil. Denis’ company has overpaid PRSI by €7735 and should apply for a refund. We get in contact with the Scope Section to start the refund process and we will get the money back for the company.
Cessation – Tax saving
Builder Bob is a sole trader and prepares accounts every year to the 30th of September. On the 1st of October 2021 he transfers the trade to a company. His profits for the last 2 years were as follows
- Year ended 30th September 2020 €80,000
- Year ended 30th September 2021 €60,000
As he ceases the sole trade business in 2021 special cessation rules apply. He isn’t taxed on the full 12 months’ profits for 2021 of €60,000. His profits for 2021 are as follows
Year of cessation 1 Jan 2021 to 30 September 21 €45,000
Bob must do a review of the prior year 2020 to see if the profits for the 12 months to 31 December 2020 are higher. If they are he will pay tax on the extra amount. Actual profits for 2020 are
| 1 Jan 2020 to 30 Sept 2020 | €80000 x 9/12 | €60000 |
| 1 Oct 2020 to 31 Dec 2020 | €60000 x 3/12 | €15000 |
| Actual Profits | €75000 |
As such, there is no additional tax to pay for 2020. The actual profit for 2020 is lower than the profits he paid taxes on of €80,000. He will save in 2021.
| Tax saving 2021 | €15000 x 52% | €7800 |
Capital Gains Tax [CGT] Losses
Not keeping track of your CGT losses can be costly. If you sell an asset at a profit, you pay CGT at 33% on the gain. When you sell an asset at a loss there is no CGT to pay. But the losses will be valuable if you sell assets and make gains in the future.
There is a tendency not to bother with the losses. Between bank shares and property thousands in the country have losses. They may not even realise they have them! Spouse’s losses can be offset against your gains. Losses on a foreign property can offset gains on Irish property.
Imelda sold a property in 2019 that has a loss of €120,000. She sold shares in 2021 that had a gain of €110,000. On her Tax return for 2021 her CGT for 2021 would look like this
| Sales proceeds – shares | €150000 |
| Less cost of shares | €40000 |
| Gain | €110000 |
| Loss Forward | €120000 |
| Chargeable Gain | Nil |
| Balance of losses forward to 2022 | €10000 |
Without the losses forward Imelda would have a CGT bill of
| Gain | €110000 |
| Less Personal Exemption | €1270 |
| Taxable Gain | €108730 |
| Tax Payable 33% | €35881 |
Year of Separation – Tax savings
Joey and Rachel separate on the 31st of May 2021. Joey prepares his accounts for the year ended 31st December 2021 and has a profit of €45,000. Rachel is a teacher and her salary for 2021 is €60,000. She paid PAYE on that of €13,640.
Joey is the assessable spouse and they do a joint tax return every year. Assuming there was no separation during 2021 their tax liability would look like this
| Total Income 2021 | €105000 |
| Tax Payable | |
| First €70600 x 20% | €14120 |
| Balance €34400 x 40% | €13760 |
| Total Tax | €27880 |
| Less Tax Credits | |
| Married | €3300 |
| PAYE | €1650 |
| Earned Income | €1650 |
| Tax Liability | €21280 |
| Less PAYE paid | €13640 |
| Balance due | €7640 |
In the year of separation, Joey pays tax on his earnings for the year and Rachel’s salary to the date of separation.
| Total Income €45k plus €60k/12 x 5 | €70000 |
| Tax Payable €70000 x 20% | €14000 |
| Less Tax credits – Married | €3300 |
| PAYE | €1650 |
| Earned Income | €1650 |
| Tax Liability | €7400 |
| Less PAYE paid €13640/12 x 5 | €5683 |
| Balance Due | €1717 |
Rachel would pay tax on her salary from the date of separation to the end of the tax year as a single person.
| Rachel’s salary 1 June to 31 December | €35000 |
| Tax Payable €35000 x 20% | €7000 |
| Less Tax credits | |
| Single | €1650 |
| PAYE | €1650 |
| Tax Liability | €3700 |
| Less PAYE paid €13640/12 x 7 | €7957 |
| Tax refund due | €4257 |
As you will see the original tax bill was €7640. This bill was reduced to €1717 for Joey. Plus, Rachel is in a tax refund position with €4257 owing to her. This is a total tax saving of €10,180. Rachel could also qualify for the single-parent child carer credit if they have children.
Summary
You’d want to be mad to do your own tax return. We have Ludmila here doing a super job for our clients to make sure they don’t pay any more than they should. Even a man as clever as Albert Einstein had to get a tax adviser to sort through the complexities of the form. Whether it be accounts, tax, or bookkeeping, having a skilled team behind you will help you and your business.
Do you want a skilled team behind you to help you and your business grow? If so, Start Here
