TMI/expenses/start up costs

[MC Deli]

There are some great points in the sticky thread "starting a business" but quite a few questions there have got lost in the length of the post - so I am am repeating a few that I am trying to find answers to...

-In the Establishing a business 2010 PDF http://www.togneri.net/files/establishi ... s_2010.pdf I am stumped by "net assets" in the entrepreneur example. What are the "net assets of the previous year" - last year's profit - I don't get it?

-When setting up a TMI or partnership company how do start up costs work with regard to equipment/tools etc. that have already been purchased - in the UK it used to be AFAIK that you could deduct equipment bought up to 4 years before, but then at 25% of the value per year - is it similar in Finland, does it differ between TMI/partnership/Oy?

-Finally, there is a (new?) 2009 edition of the book Establishing and doing business in Finland (Holopainen, Tuulikki) - does this include info on the new tax account, and if not, does the new tax account system make large parts of the book obsolete - is it still worth getting? <EDIT: I found this book, it doesn't have tax account info, it does look very useful for the admin side of setting up a business - that said at 50-60e it is really only collecting info that is readily available about where to register and the forms you need. Half the book is the same info in Finnish so it is not exhaustive. Seems to me if you can afford the book you can probably afford professional advice - definitely one for the library though!.>

[Rosamunda]

There are some great points in the sticky thread "starting a business" but quite a few questions there have got lost in the length of the post - so I am am repeating a few that I am trying to find answers to...

-In the Establishing a business 2010 PDF http://www.togneri.net/files/establishi ... s_2010.pdf I am stumped by "net assets" in the entrepreneur example. What are the "net assets of the previous year" - last year's profit - I don't get it?

Which page in that document ?
I agree some of the terms are a bit lost in translation.

-When setting up a TMI or partnership company how do start up costs work with regard to equipment/tools etc. that have already been purchased - in the UK it used to be AFAIK that you could deduct equipment bought up to 4 years before, but then at 25% of the value per year - is it similar in Finland, does it differ between TMI/partnership/Oy?

This question came up at the course filecore and I attended a few months ago. IIRC we didn't get a proper yes/no answer. In fact you rarely get a Y/N answer when it comes to deductibles and tax. Most of it is a bit grey and fuzzy "it depends" and "only if it is reasonable". When I started my Oy I already had an expensive laptop which I had bought the previous year and a ton of books. My SO (who is a beancounter by trade) said I couldn't deduct any of it because you need receipts and the receipts have to date after the registration of the company. OTOH I suppose you (the person) could sell yourself (the TMI) some of those assets for their residual value.... only Vero can say whether or not that is OK.

-Finally, there is a (new?) 2009 edition of the book Establishing and doing business in Finland (Holopainen, Tuulikki) - does this include info on the new tax account, and if not, does the new tax account system make large parts of the book obsolete

I guess the book will be updated fairly soon, revised according to the new Tax Account system and also the changes in VAT (and maybe more stuff in the pipeline). The 2009 edition does not include any info on the new Tax Account system so yes, parts of it are out of date. I think the book is updated every couple of years, so we are due for a new one soon.

- is it still worth getting? <EDIT: I found this book, it doesn't have tax account info, it does look very useful for the admin side of setting up a business - that said at 50-60e it is really only collecting info that is readily available about where to register and the forms you need. Half the book is the same info in Finnish so it is not exhaustive. Seems to me if you can afford the book you can probably afford professional advice - definitely one for the library though!.>[/quote]

I bought it (and deducted it as a business expense) and I have used it a lot but I have an Oy and I do employ people (summer jobs mostly) so it has been useful for that. If you are a self-employed TMI and not employing anyone else then I'm not sure you would get your money's worth. Borrowing from the library sounds like a better idea. And then you could photocopy the pages that are specific to TMI (eg there are some useful tables at the back of the book). There is a lot of info on line these days. And if you have a specific question I can always look it up in the book for you!!!

[MC Deli]

What are the "net assets of the previous year" - last year's profit - I don't get it?

Which page in that document ?I agree some of the terms are a bit lost in translation.

Page 8/9, example 1

start up costs

This question came up at the course filecore and I attended a few months ago. IIRC we didn't get a proper yes/no answer. In fact you rarely get a Y/N answer when it comes to deductibles and tax. Most of it is a bit grey and fuzzy "it depends" and "only if it is reasonable". When I started my Oy I already had an expensive laptop which I had bought the previous year and a ton of books. My SO (who is a beancounter by trade) said I couldn't deduct any of it because you need receipts and the receipts have to date after the registration of the company. OTOH I suppose you (the person) could sell yourself (the TMI) some of those assets for their residual value.... only Vero can say whether or not that is OK.

That is in line with the lack of info on Vero.fi and elsewhere - and also really bizarre. AFAIK if you are TMI you cannot sell stuff to yourself - you could sell stuff to your Oy if you had one. This seems bizarre really. I am buying lot of equipment/tools now (while working full time) in preparation for being self employed. Surely there must be a guide on how these would be deductible? I guess a trip to IntoFinland is in order.

<EDIT> Thanks for the reply BTW

[Rosamunda]

OK, this bit:

A private entrepreneur (business person or
self-employed person) is not separately liable
for tax, but the business results (income
subject to tax reduced by deductible
expenses) is divided into the entrepreneur’s
capital income and earned income on the
basis of the net assets of the previous year.
Of the results is 18 per cent of the net assets
mentioned above regarded as capital
income, the rest is regarded as earned
income (Example 1). Since the year 2001 a
private entrepreneur may alternatively
choose 10 per cent of the net assets to be
regarded as capital income. The capital
income is counted as annual return. The
duration of the accounting period has some
effect on the sum of the capital income.

I hate that kind of English, written by a Finn trying to sound "official". The terminology is up the creak, the style is quite unnecessarily awkward. I don't understand why the ministries and NGOs don't get all this stuff proof read by native speakers before they publish it.

In Holopainen's book (2007) p149 she uses "net property":

Private Entrepreneurship - Income tax
The tax rate of capital income is 28%. The tax rate of earnings income is progressive.
The net result of a business and trade activity is added up with the other income of the entrepreneur. Of the result of the undertaking, an 20-% annual yield calculated on the net property of the previous year is considered capital income. However, if he so wants, the entrepreneur may demand that 10 % of the result be considered capital income. The rest is earnings income. (sic)


To be honest, I have no idea how that works in practice. Ask filecore. He has a TMI.

(At a guess I would say they are referring to the NET RESULT of the previous year. There is probably a good reason why they do not use "result" for private entrepreneurs (maybe because it is personal taxation and not company taxation and may include income from other sources eg if a person has a salaried job AND a toiminimi) but it is confusing and should at the very least be defined in the text or in a glossary somewhere.)

[MC Deli]

Thanks again. Clear as mud on both previous start up costs and "net assets" then!

I will try to find out from Into/Vero...

[MikeD]

Regarding "net assets":

Net assets are, in all simplicity, what the tmi owns (cash, goods, property, equipment etc.) or is owed minus what the tmi owes, as per the balance sheet. It is used to determine how much of the taxable income (=the net result), as per the income statement, is taxed as capital income (fixed rate) and how much as earned income (progressive taxation) in your personal taxation.



Regarding start up costs:

This is a bit fuzzy, that's true. Basically everything that you buy for business use should be deductible, but if you buy them several months in advance it could be argued that by the time they become property of the tmi they're actually "used", which would open a whole new can of worms.

By the way, there's no reason why you shouldn't register your toiminimi as soon as possible, even if you're not actually planning to start doing whatever it is that you're going to do just yet.

[Rosamunda]

Regarding "net assets":

Net assets are, in all simplicity, what the tmi owns (cash, goods, property, equipment etc.) or is owed minus..

Does this mean that TMIs have to depreciate their assets ? I thought TMI bookkeeping was supposed to be straightforward. You might just as well have an Oy if you have to amortize equipment and the like (BTW Finnish accounting rules for depreciation are totally archaic). So on what basis are you supposed to evaluate the net assets at the end of the previous period?

I can understand why the guy who did the TEKeskus training last Spring strongly recommended that you open a separate bank account for your TMI. Imagine trying to keep tabs on your cash TMI versus own money if you do it all through one account!!! I am more and more confused about the real advantages of having a TMI when it only "costs" 2500€ to start up an Oy.

BTW... I remember somebody at the training session asking for a magic formula (eg Excel spreadsheet) for optimising tax (capital versus personal). The trainer said he'd tried and failed to figure one out as there is a circular reference in there somewhere.

I agree with the above.... you should register your TMI asap. I don't think you have to register for VAT as well, that comes later. Not sure about the YEL but IIRC there is a minimum turnover before you have to start chipping in.

[MikeD]

Does this mean that TMIs have to depreciate their assets ? I thought TMI bookkeeping was supposed to be straightforward. You might just as well have an Oy if you have to amortize equipment and the like (BTW Finnish accounting rules for depreciation are totally archaic). So on what basis are you supposed to evaluate the net assets at the end of the previous period?

In many cases, yes.

In some cases it is possible for tmi's to do their bookkeeping according to the single-entry system, but normally the double-entry system is used and the bookkeeping is done largely in the same way as it would for an Oy. Which means that unless your business is really, really small, I'd advise getting a professional accountant to do the job for you.

I can understand why the guy who did the TEKeskus training last Spring strongly recommended that you open a separate bank account for your TMI. Imagine trying to keep tabs on your cash TMI versus own money if you do it all through one account!!! I am more and more confused about the real advantages of having a TMI when it only "costs" 2500€ to start up an Oy.

Interestingly enough, money on bank accounts does not count as a net asset when determining the taxation, but cash does... In any case, a separate bank account for the tmi is a must.

BTW... I remember somebody at the training session asking for a magic formula (eg Excel spreadsheet) for optimising tax (capital versus personal). The trainer said he'd tried and failed to figure one out as there is a circular reference in there somewhere.

Yes, no magic formula there. One of the main differences between an Oy and a Tmi is that with the Tmi, you're virtually free to take as much money from the business as you wish (and similarly put as much of your own money into the business as you wish), whereas with an Oy it's much more complicated. There are more formalities involved in running an Oy in many other respects as well. It's really up to personal preference in the end.

[Rosamunda]

There are more formalities involved in running an Oy in many other respects as well.

Not really. OK yes, if you have sleeping partners and investors who want dividends and permanent employees etc. But if it's a small business like ours, I'm not sure it is any more complicated than a TMI. When I was thinking of starting up a TMI it was my (Finnish, beancounter) husband who suggested I just stuck with the Oy.

But like you say, it's preference. I do think more people would go for Oy if they had information about the pros and cons. Certainly if the business you are in involves any risks (eg customer credit issues, employment issues, health and safety etc) I would STRONGLY recommend an Oy. Remember... there is no personal bankruptcy in Finland.

[MC Deli]

Regarding "net assets": Net assets are, in all simplicity, what the tmi owns (cash, goods, property, equipment etc.) or is owed minus what the tmi owes, as per the balance sheet. It is used to determine how much of the taxable income (=the net result), as per the income statement, is taxed as capital income (fixed rate) and how much as earned income (progressive taxation) in your personal taxation.

OK how about a real world example: So you have a TMI and buy a computer. The first year you are a able to deduct 25% of the cost as a business expense (if amortization is true???) but the next year you have to pay 28% tax on 18% of the cost of the computer as it is then a "net asset"...?

Regarding start up costs: This is a bit fuzzy, that's true. Basically everything that you buy for business use should be deductible, but if you buy them several months in advance it could be argued that by the time they become property of the tmi they're actually "used", which would open a whole new can of worms.

"Used" - do you have any source for this - any Vero documents you could point me towards?

By the way, there's no reason why you shouldn't register your toiminimi as soon as possible, even if you're not actually planning to start doing whatever it is that you're going to do just yet.

This is the key question for me. The reason for not setting up a TMI immediately is if the rules regarding purchase of equipment prior to the start date are different between TMI and Oy...?

[MC Deli]

... if the rules regarding purchase of equipment prior to the start date are different between TMI and Oy...?

...and my understanding is that the rules are different. If you have an Oy then you, as an individual, can sell all the equipment to the Oy. Whereas if you are TMI then you would have to do something "grey" like give all the equipment away to helpful people and "buy" it all back (which is how lots of people do it apparently)... am I right on this?

[MikeD]

Regarding "net assets": Net assets are, in all simplicity, what the tmi owns (cash, goods, property, equipment etc.) or is owed minus what the tmi owes, as per the balance sheet. It is used to determine how much of the taxable income (=the net result), as per the income statement, is taxed as capital income (fixed rate) and how much as earned income (progressive taxation) in your personal taxation.

OK how about a real world example: So you have a TMI and buy a computer. The first year you are a able to deduct 25% of the cost as a business expense (if amortization is true???) but the next year you have to pay 28% tax on 18% of the cost of the computer as it is then a "net asset"...?

You still only pay tax on the profit your business makes.
Simplified example: Let's assume your profit for the first fiscal year, before taxes, is €15,000. Your net assets are €5,000. Out of your profit, a sum which represents 20% of your net assets is taxable as capital income. In this case, 20% of €5,000 is €1,000. So, you pay 28% capital income tax on €1,000 and normal income tax on the remaining €14,000.

By the way, there's no reason why you shouldn't register your toiminimi as soon as possible, even if you're not actually planning to start doing whatever it is that you're going to do just yet.

This is the key question for me. The reason for not setting up a TMI immediately is if the rules regarding purchase of equipment prior to the start date are different between TMI and Oy...?

An Oy starts to legally exist when it is registered, whereas (in a sense) a tmi exists when you decide it does (although you'll need to register with Vero) so yes, the rules are different. In either case, having the business properly set up before doing anything else will make things a lot easier and will reduce the chance of trouble with Vero. In your case, there should be no harm in setting up a tmi immediately - if you later decide that Oy would suit you better, you can always start an Oy and sell whatever equipment, goods etc. you have under the Tmi to the Oy.

Regarding start up costs: This is a bit fuzzy, that's true. Basically everything that you buy for business use should be deductible, but if you buy them several months in advance it could be argued that by the time they become property of the tmi they're actually "used", which would open a whole new can of worms.

"Used" - do you have any source for this - any Vero documents you could point me towards?

... if the rules regarding purchase of equipment prior to the start date are different between TMI and Oy...?

...and my understanding is that the rules are different. If you have an Oy then you, as an individual, can sell all the equipment to the Oy. Whereas if you are TMI then you would have to do something "grey" like give all the equipment away to helpful people and "buy" it all back (which is how lots of people do it apparently)... am I right on this?

The problem with the equipment being bought from an individual (or any legal entity not VAT registered) in either case is that the VAT included in the purchase price is no longer deductible. There's also the problem of what constitutes 'fair price', especially with the Oy buying from yourself or your relatives - basically the opinion of an outside expert would be required unless the sums paid are negligible or clearly less than market value.

[MC Deli]

You still only pay tax on the profit your business makes.
Simplified example: Let's assume your profit for the first fiscal year, before taxes, is €15,000. Your net assets are €5,000. Out of your profit, a sum which represents 20% of your net assets is taxable as capital income. In this case, 20% of €5,000 is €1,000. So, you pay 28% capital income tax on €1,000 and normal income tax on the remaining €14,000.

Brilliant explanation thanks - and to get advice from one of the Beastie Boys too

An Oy starts to legally exist when it is registered, whereas (in a sense) a tmi exists when you decide it does (although you'll need to register with Vero) so yes, the rules are different. In either case, having the business properly set up before doing anything else will make things a lot easier and will reduce the chance of trouble with Vero. In your case, there should be no harm in setting up a tmi immediately - if you later decide that Oy would suit you better, you can always start an Oy and sell whatever equipment, goods etc. you have under the Tmi to the Oy.

Well if... if you make a loss in one year as a TMI, does it get carried over to the next year (if you show via equipment costs and expenses that you lose money in one fiscal year, does that get deducted from your taxable income/profit the following year - and is it the same for TMI and Oy)?

(I have a lot of equipment I have been purchasing and if I process it all via TMI and find out the deductible value is effectively lost in a TMI, then I certainly shouldn't start a TMI - that's my niggle - and instead start an Oy so I can account for all the equipment costs)

The problem with the equipment being bought from an individual (or any legal entity not VAT registered) in either case is that the VAT included in the purchase price is no longer deductible.

But If you are TMI and not VAT registered because of low turnover this shouldn't be a problem?

[Rosamunda]

It's not a problem if you don't want to get the VAT relief on your purchases! I guess the main difference between doing something as a hobby and running it as a business is claiming back purchase VAT! MikeD is right, you cannot deduct purchase VAT if you are not invoicing VAT to your customers.

The limit for VAT registration is 8500€ in a year. TURNOVER. ie the total of everything you invoice to your customers. If you bill 8501€ you owe Vero the VAT on the whole amount (not just the 1€ above the limit) - so it makes sense to register. The new Tax Account system means you only have to file VAT returns quarterly if you have a low turnover.

If I were you I would STOP buying stuff for your business until you have registered your business.

But your business model seems weird to me. On the one hand you suggest you will have a turnover LESS than 8500€ in your tax year but on the other hand you want to deduct equipment and supplies... Of course this means you will make a loss (though don't forget you have to depreciate equipment over several years so the expense is spread out over the life of the assets and thereby matched with the revenue those assets are generating). Trading losses can be carried forward in an Oy but I have no idea how this works for a TMI (since you are taxed on your global income). In any event, losses can only be offset against future profits...

[MC Deli]

If I were you I would STOP buying stuff for your business until you have registered your business.

Not possible unfortunately. I am about to stop working full time. If I don't buy the things I need now, I will not have the money in the future. Also, I need the equipment at the start. As i said earlier - UK - 4 years - equipment purchased up to 4 years prior to commencement can be amortized and deducted. I also have things on order - if they come I have to buy.

But your business model seems weird to me. On the one hand you suggest you will have a turnover LESS than 8500€ in your tax year but on the other hand you want to deduct equipment and supplies... Of course this means you will make a loss (though don't forget you have to depreciate equipment over several years so the expense is spread out over the life of the assets and thereby matched with the revenue those assets are generating). Trading losses can be carried forward in an Oy but I have no idea how this works for a TMI (since you are taxed on your global income). In any event, losses can only be offset against future profits...

OK, I will explain my actual situation. I am about to become freelance/self employed/entrepreneurial doing all kinds of music and marketing related activities. I will also be a student. I finish full time work in a few weeks time. In the last few months, and in the next few weeks, I have been buying the things I will need in the next 2-3 years to be self-employed. Once I stop earning a wage the money will disappear! You understand my dilemma and my questions.

e.g. If I TMI, then for the rest of this year I expect to earn very little but process a lot of start up related costs. Even next year, I expect to barely cover the start up costs. In common with a lot of musicians I have a lot of equipment. Of course, it is my interests to set up my business in the way that can best deduct these costs against future profit. Whether it is TMI or Oy? Now or on Jan 1st 2011? If I should sell and rebuy my equipment? If I should not become TMI while making a loss because I will have to pay YEL that I cannot afford because I would have taxable income?