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 3 Things You Need to Know About Deductibility of Expenses, From an Accountant’s Perspective [examples included]

Introduction

In this post, we will talk about just a few (there are many) different types of tax deductions. Deductions apply to many types of taxpayers; you can be an individual, a business entity, or maybe even an investor. We’ll show you a few examples of how deductions are used and provide two examples of how to calculate a tax on salary deduction. Tax deductions are important because they can offset the amount that is owed to the government, and for an individual taxpayer, this means less money taken out of your paycheck, and more money in your pocket at the end of the month. For business taxpayers, having extra money to invest in your company is not only a benefit, but it can help you grow and improve your bottom line at the end of the year.

What are tax deductions?

Simply put, tax deductions reduce how much you pay in taxes by lowering your taxable income. When you hear the word deduction, just think subtraction. You’re subtracting how much of your income is taxed and reducing how much you owe to the government. Deductions are typically expenses that an individual or business taxpayer incurs during the year to carry on their job function or business.

Why are deductions Important?

The purpose of tax deductions is to decrease your taxable income, thus decreasing the amount of tax a taxpayer will owe to the government. Deductions reduce a taxpayer’s monetary burdens by creating some savings for a taxpayer. Individual and business taxpayers should stay abreast of any tax benefits they may be eligible for, to capitalize on their rightful tax savings.

What are the different types of deductions? 

There are many types of deductions available to the taxpayer. You may be an individual, a business, or even an investor. An individual may qualify for family-based deductions which can reduce the tax-on-salary [tax], and some work expenses may be deducted if they incurred the expense while carrying out their job responsibilities.

Businesses may deduct certain business expenses if they are paid or incurred in a tax year to carry on business. While we just mention two types of deductions, there are many. Interest expenses, depreciation of tangible and intangible property, and even deductions for oil and gas miners. With so many deductions to figure out, wouldn’t it be great if there was a simple solution that made calculating deductions quick and easy?

How to Calculate dependent deductions for family members (Tax on Salary [TOS])

Deductions for dependent family members reduce the monthly taxable base on
which TOS is calculated. A deduction of KHR150,000 per month (approximately
US$37.50) may be deducted for each minor dependent child under 14, or under
25 and in full-time education
, and a deduction for the same amount for one nonworking spouse.

Let’s look at two (2) different examples to make sure you understand it: We will calculate an individual taxpayer’s monthly taxes without claiming a deduction, and then an example when he does claim the dependant.

  1. Let’s consider a male individual taxpayer with a dependent. He does not claim the deduction. He has a non-working spouse but does not claim the exemption. His monthly income is $514.00 USD the tax on Salray rate is KHR4083, this gives us a total taxable salary of 2,098,662- this taxpayer is in the 10% tax bracket. The total amount of tax-on-salary to be paid is KHR44,866
  2. Let’s also consider the same male as above, but this time, he claims a dependant on his taxes. His monthly income is still $514.00 USD the tax on Salary rate is KHR4083, this gives us a total salary of 2,098,662- because he claims the dependant, he gets a KHR150,000 deduction that is applied to his base tax of 2,098,662, which lowers the taxable base to 1,948,662. Because the new base salary is below the threshold of the 10% tax bracket (KHR2,000,000), the TOS rate lowers to 5% and the monthly tax due is now only KHR33,433.

Closing

With these two examples, you can see the tax calculations can get quite complicated to calculate tax on salary. We didn’t even mention the bias that is applied when doing the above calculation, in addition, there are stipulations on the dependant claimed as a deduction.

You can go at it alone (using excel) or you can have your own virtual accountant with ASEANTAX.

KEY TAKEAWAYS

  • Tax deductions reduce the amount of tax you need to pay to the government. This is applicable to both individuals and businesses.
  • Not all business expenses are deductible.
  • Tax-on-salary deductions (for an individual taxpayer) for a child are applicable if your dependant is under 14, or 25 if they are enrolled in full-time education.

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Disclaimer: This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice.

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