(a) Mr Wang operates a sole proprietorship. His results for the year 2014, before taking into account any of the consultant’s advice (see below), are as follows:
Explain whether the individual income tax (IIT) payable by the sole proprietorship can be reduced by charging the two items suggested by the consultant to the business.
A salary paid to a proprietor (i.e. Mr Wang) is not deductible for IIT purposes and so cannot reduce the taxable income of the sole proprietorship.
Interest on a loan calculated on an arm’s length basis is tax deductible and so can reduce the IIT payable by the sole proprietorship.
Calculate the IIT liability of the sole proprietorship for the year 2014 assuming that both of the items were charged to the business.
IIT liability of Mr Wang’s sole proprietorship for 2014
