Some of the most successful businesses
globally started out as family businesses and they have evolved over
time to become formidable forces globally. Closer home, in Kenya we also
have family business that have been a success story.
Running
a family business can be a complex task because it requires one to
balance the expectation of family members while still steering the
business towards success. At the onset you will find that most family
businesses will majorly involve family members in the running them.
However, as the business grows, it becomes necessary to hire people with
certain competencies to lead the business into the future.
One
of the things that can significantly impact the strategic planning of
family businesses is tax. When making decisions on investment, financing
or expansion it is important for family business owners to consider the
tax impact of the decisions at the start. This approach enables the
business to take advantage of any tax planning opportunities that may
exist, enhance its compliance level and therefore reduce the risk of
possible tax exposure in the future which may be quite costly.
Some
of the considerations are, as the business diversifies its streams of
income, how are these incomes reported for corporation tax? The Income
Tax Act requires that profits from specified sources of income should be
computed separately. Consequently any losses from a specific source of
income should only be deducted against future gains from that same
source of income. For example, a family business generates revenue from
rental income and farming, these two streams of income and their related
expenses should be reported separately for tax. Therefore, the business
should not be tempted to offset a loss on farming income against a
profit on the rental income.
Requirement under the
taxation laws sometimes pose a challenge to family businesses and
especially those that have not been able to clearly have a demarcation
on what concerns family and what concerns the business. One of the
requirement when determining the amount of corporation tax to pay, is to
deduct only expenses that are wholly and exclusively incurred in
generation of business income. Sometimes in family businesses, you will
find that the business bears both personal and business costs. Personal
costs of family members should not be deducted against the business
income as this was not used to generate business income.
The writer is a senior tax Manager with EY.
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