If you are a sole proprietor, you may be wondering whether income received before starting a business is considered business income. This blog post explains how to determine if income received before starting a business is considered part of the company's profits and what to look out for on your tax return. Keep reading for more information.
In addition, we have also written this article related to income tax.
Is income earned prior to the filing of the opening of the business not considered business income?
When must the "Notification of Opening of Business" be submitted?
According to Article 229 of the Income Tax Law, it is legally required to submit a notification of business opening to the tax office within one month from the actual date of opening of the business. There is no penalty for late submission, but there are various advantages, such as the use of a blue tax return or the substitution of a certificate for opening an account at a bank, etc. Therefore, it is advisable to submit the notification of business opening within one month from the date of opening.
Even if you are late, be sure to submit the form properly. In this case, it is a case of a slight delay in submitting your business registration. If you have not submitted it at the time of filing your tax return, you will be questioned as to whether you have started a business as self-identification. Usually, this is within a month, so if you know yourself that you have business income in that December, you would normally file your tax return by January. Also, if it gets complicated, you should bring in a tax attorney. If you are going to do anything other than the usual, it is safer to keep the cost down.
What is "income prior to the filing of the opening of the business?"
However, there are cases where a business is started without being fully aware that it is a business. In reality, there are cases where people start a business without realizing it.
In such a case, you will have income prior to submitting the opening statement. However, submit the form as soon as you recognize it. Self-recognition is important, respecting also the intention under civil law to file a tax return, etc.
What is "business income?"
Business income is income earned from operating a business. It includes income from farming, fishing, manufacturing, wholesale, retail, service, and other businesses. However, real estate rent, forestry income, and transfer income are not included in business income. Businesses of sole proprietors, celebrities, horse race riders, etc. are also considered business income. Generally, business income is money earned from farming, fishing, manufacturing, wholesale, retail, service, and other businesses that fall under the
In other words, it is money earned by an individual through a business.
Regarding "whether income earned prior to the filing of the opening of a business can be considered business income."
Generally, income earned prior to filing a business registration can be reported as business income. In some cases, it is treated as miscellaneous income, but it can be filed as business income. For example, even if you filed your business registration on April 1 and had income of 100,000 yen from January to March of the same year, it would still be considered business income.
I want to make sure I have the implications straight. In this case, the income from January-March is the period prior to the opening of the business, but the question is whether it can be considered a period to determine whether the business will be established as a business thereafter. If applicable, it is business income; otherwise, it is treated as miscellaneous income.
Income received by an individual as a salary is essentially unrelated to the business.
Income that an individual receives as salary is essentially unrelated to a business. In other words, if you work for a company, your income is treated as employment income, not business income. The same is true if you have a part-time job on the side.
It is important to make a distinction between a sole proprietor doing contracting work and working as an employee of a company. In some industries, this distinction may be ambiguous. It is important to clearly indicate your intentions considering the civil law, and to put it in writing so that you can follow up on it later. When determining whether income falls under the category of business income or employment income, it is important to properly declare the income according to the individual's situation. Note that this classification is not arbitrary.
Income may be treated as miscellaneous income if a business opening is not filed after the income is generated.
If you do not file a notice of opening of business long after the income has been generated, the income may be treated as miscellaneous income. Although it is not mandatory to file a business opening notification, it is important to indicate that you intend to open a business. If the income is treated as business income, there are tax advantages, such as deductions for necessary expenses. The same is true for income received prior to opening a business, which can be treated as business income by submitting a notification of opening of business.
Be prepared so you don't have to make excuses. The presence or absence of an opening statement on the tax return for the year determines the prime factor in whether the income can be treated as business income or miscellaneous income. If you file after the filing deadline, it may be treated or forced to be treated as miscellaneous income. Therefore, it is important to prepare the opening notification as early as possible to clarify the classification if you expect to generate income even before opening your business.
If the goods of income in the pre-opening period are goods sold after the opening of the business, it is highly likely that they will be classified as business income.
If income made during the pre-opening period is applicable to products sold after the opening of the business, the income may be considered business income. This means that income received before the opening of the business may also be included in business income. There may be an excuse that it is difficult to have foresight, but in these cases, you should submit the opening notification as early as possible so that it can be submitted at any time, but not later than the filing period.
In addition, if income is generated in the period prior to the opening of the business, the income may be treated as miscellaneous income if the business has not submitted a business registration form, so due care should be taken in advance. If you think that "business income is advantageous," then you should prepare the proper application and system. We understand that you do not usually want to do so, but you may want to take advantage of the good taste by only filing a business income tax return. However, again, you should prepare proper notification and evidence.
On the other hand, it is not enough to file a business registration to be considered business income. In cases where people have been caught for tax evasion, there was a method of "investing as a business, incurring a loss, and then deducting the loss from employment income". The person who taught this method was arrested.
If there is a high likelihood that income from the pre-opening period will fall under business income, it is advisable to consult a tax accountant, accountant, or other professional in advance.
Side business? Income before opening a business? Examples that do not constitute business income
A typical example of business income from pre-opening income is when a sole proprietor earns income from operating a business. This income is classified as business income and can be used to determine if the business is viable using the time period before the business is started.
Rather than whether or not you have a business license, you should carefully consider whether the income is from your main business. If it is a business incidental to your main business, then it would be included in business income. The associated expenses will also be included as necessary expenses.
However, if it is a side job, hobby, or spending money, it is miscellaneous income. We would like to make sure that it is relevant enough to properly explain to the tax accountant.
How to file a tax return if your pre-opening income is business income
Unlike salaried workers, sole proprietors are required to file tax returns.
Most people file a blue return, but a special blue return deduction
Generally, if you file a tax return for your pre-opening income as business income, you must deduct the annual income earned as a sole proprietor from your income tax credit. If the amount is positive, a tax return must be filed. However, if the amount is less than 480,000 yen, no income tax is due. Therefore, it is important to ensure that all necessary deductions are taken into account when filing your tax return.
Note that these are the three basic requirements to qualify for a blue tax return.
Requirements for Special Blue Return Deduction
- Real estate income or business income.
- Bookkeeping is done according to regular bookkeeping principles (generally double-entry bookkeeping)
- The balance sheet and profit and loss statement prepared based on the bookkeeping described in (2) above shall be attached to the tax return, stating the amount to which this deduction is applicable, and said return shall be filed by the due date of the tax return for the year (March 15 of the following year).
Sole proprietors are required to file an income tax return in order to accurately calculate and pay their income taxes. The deadline for filing tax returns is the same as the deadline for paying taxes, usually March 15 of the following year. Documents such as invoices, receipts, and bank statements should be compiled daily
We hope this article helps you understand the tax return process. If you have any questions or would like to discuss your individual situation, please contact us.
In addition, if you are concerned about the expense nature of masks, here is an article on the subject. Please read it when you have time.