Tax liability of the sole proprietorship
When taking the step into self-employment, the tax situation changes. As a self-employed individual, you will also be faced with new types of taxes – here’s a brief overview.
Income & Wealth Taxes
Income from self-employment is subject to income tax, just like wages from employment. If proper accounting records are maintained, these generally serve as the basis for determining taxable income: The profit of the sole proprietorship is considered income.
Separation of business and private assets is important Profit is determined by deducting all business-related expenses from the generated income (e.g., material costs, rent, interest, expenses, etc.). Personal expenses (e.g., weekend shopping payments) cannot be deducted and must be clearly separated from business expenses. Common problem areas include company cars, restaurant expenses, or telephone charges. It should be possible for the tax authorities to understand what portion of the expenses served private purposes and which served the business.
When it comes to the assets of the sole proprietor, it’s important to distinguish between business and private assets. Assets that predominantly or entirely serve the self-employed activity are considered business assets, even if the acquisition was financed with private funds. Depreciation (e.g., write-offs, provisions) are tax deductible for business assets, reducing the profit of the sole proprietorship. Conversely, the same applies to increases in the value of business assets; they increase the profit.
Here’s an example:
The sole proprietorship “Mode Zürich Meier” made a profit of CHF 90,000 (before depreciation) last year. Mrs. Meier, owner of the Zurich sole proprietorship, also owns a car (value: CHF 40,000), which she uses to transport the latest fashion from Northern Italy to her store. The car is therefore considered a business asset. Depreciation on her car thus reduces the profit of Mode Zürich Meier. If she writes off her car by 40% (CHF 16,000), her sole proprietorship still makes a taxable profit of CHF 74,000. If she had only used the car for private purposes, the depreciation would not have been relevant for income taxes.
Value Added Tax (VAT):
Every sole proprietor must determine whether they are subject to VAT and, if necessary, register with the Federal Tax Administration. This will be the case once annual turnover exceeds CHF 100,000.
