How Sole Proprietors Can Reduce Business Taxable Income
As Enterprise revenue is treated as the owner’s personal income, Sole Proprietors doing well in business can reach a point where they feel penalised for their success.
This is especially once they hit six figures and the hand of LHDN comes down from heaven.
MISHU forever advocates entrepreneurs be legally upstanding citizens who pay their taxes.
However, legally reducing tax obligations is absolutely fine by us, and here are two strategies to try if your Enterprise has started earning megabucks.
Let’s begin.
1. Partial deduction on vehicles / home rental
You can claim partial tax deductions for personal vehicles in your name provided they are used for business activities.
Activities that qualify for business revenue generation include:
- Meeting clients at their offices
- Delivering items to customers
- Meeting suppliers, vendors, contractors, staff, or service providers
- Purchasing office and business supplies, and
- Driving to the bank to for business
Note: Commuting between the home and office does NOT qualify as a business activity and cannot be used to justify a partial deduction.
Your home rental is also eligible for partial tax deduction if running a home-based business.
Naturally, you need receipts, invoices, pictures, and relevant business licenses that link the vehicle and residential address to your Enterprises’ business activities.
2. Convert your business into a Sdn Bhd
Sdn Bhd with paid up capital of not more than RM2.5 million and gross business income of not more than RM50 million are subject to the following corporate tax rates in YA2023:
| Income Range | Tax Rate |
| On first RM150,000 | 15% |
| RM150,001 to RM600,000 | 17% |
| RM600,001 and beyond | 24% |
Meanwhile, Enterprise revenue is subject to personal income tax rates:
| Income Range | Tax Rate |
| 100,001 – 400,000 | 25% |
| 400,001 – 600,000 | 26% |
| 600,001 – 2,000,000 | 28% |
| Exceeding 2,000,000 | 30% |
Because of this, once a business starts growing and generating significant amounts of revenue, it will owe less in tax if it operates as a Sdn Bhd.
However, if you’re converting an Enterprise to a Sdn Bhd to save overall costs and keep more of your money, you need to consider a few other factors.
Factors to consider before converting
These are the figures you need to know:
- Your total tax obligations after claiming all deductions from business expenses and personal tax reliefs
- How much you’d instead owe with a Sdn Bhd
- Annual Sdn Bhd upkeep costs
A Sdn Bhd typically incurs RM4,200 – RM11,500 in annual fees, so there should be a RM4,200 difference in tax owed to justify converting to a Sdn Bhd.
Some of you may be thinking this is pointless since the difference is offset by annual maintenance fees resulting in zero cost savings.
You’re right! But let us explain.
This is what we at MISHU call ‘the tipping point’, where it effectively costs nothing to convert an Enterprise to a Sdn Bhd.
Your tax savings begin and scale dramatically as your YoY revenue increases – every additional Ringgit is taxed less through a Sdn Bhd versus an Enterprise.
Of course, this assumes your personal tax deductions and maintenance fees stay constant.
Check out LHDN’s official list of personal tax deductions but remember it’s impossible to predict personal tax reliefs since life has a habit of happening.
Sdn Bhd upkeep fees vary mostly due to changing accounting, audit, and tax needs, so any increased fees should be more than absorbed by the additional business revenue.
Let’s end with an example using the fictional Abu who has bravely agreed to share his income online 😀
Example: Abu the Sole Proprietor
Abu sells the only zero calorie rojak and cendol in the Klang Valley, giving him a monopoly on middle aged housewives and tiktokers with body image issues.
Abu makes a lot of money, and he’s wondering if he should convert his Enterprise to a Sdn Bhd.
Here’s a breakdown of Abu’s situation:
- Annual Revenue: RM250,000
- Taxable Income (after deductions): RM200,000
As a sole proprietor, business revenue is personal income and tax obligations are as follows:
| Income Range | Tax Rate | Tax Amount |
| Up to RM 5,000 (Bracket A) | 0% | RM 0 |
| RM 5,001 – RM 20,000 (Bracket B) | 1% | RM 150 |
| RM 20,001 – RM 35,000 (Bracket C) | 3% | RM 450 |
| RM 35,001 – RM 50,000 (Bracket D) | 6% | RM 900 |
| RM 50,001 – RM 70,000 (Bracket E) | 11% | RM 2,200 |
| RM 70,001 – RM 100,000 (Bracket F) | 19% | RM 5,700 |
| RM 100,001 – RM 200,000 (Bracket G) | 25% | RM 25,000 |
| Total Tax | RM 34,400 |
This is how much the same income would be taxed if it were a Sdn Bhd:
| Income Range | Tax Rate | Tax Amount |
| Up to RM 150,000 | 15% | RM 22,500 |
| RM 150,001 – RM 200,000 | 17% | RM 8,500 |
| Total Tax | RM 31,000 |
This gives us a difference of RM3,400, which tells us Abu is almost at the tipping point.
If tax savings were his sole motivation, it wouldn’t make sense to convert just yet.
But there are other benefits offered by a Sdn Bhd over an Enterprise which may make Abu convert even before he reaches the tipping point.
Other factors to consider
Aside from lower tax obligations, Sdn Bhds offer owners three advantages over Enterprises:
- personal asset protection from business debts, and
- opportunities to raise funding by selling company shares
- an easier time securing business loans and government grants
If you want to grow your business, you will likely need to secure loans or offer equity to raise funding. Because nothing is guaranteed in business, taking on loans means taking on liabilities, and that’s where having limited liability protection becomes invaluable.
Let MISHU help convert your Enterprise to a Sdn Bhd
If you need help estimating your partial deductions or incorporating a new Sdn Bhd, our team is always ready to help – get in touch!