Tongwang Sharing | The Embarrassment of Losing Hundreds of Thousands of Yuan in Individual Income Tax Deductions Due to a Few Dozen Yuan in Manuscript Fees Has Been Temporarily Resolved
Time:
2022-05-29
Author:
Yu Kun
Source:
Tongwang Tax Law
Visits:
23
Preface
As the final settlement and payment of individual income tax for 2021 is about to end, I thought everyone had already accepted the policy dividend from the State Taxation Administration before the final settlement and payment of business income on March 31. However, I recently chatted with a friend from a financial and tax company who is responsible for accounting for other law firms and found that they had not noticed the policy changes. As someone who knows a little about financial and tax knowledge and maintains a sense of awe for the law, I had no choice but to reject several lecture fees and manuscript fees in order to ensure the purity of my business income. To avoid this embarrassment, it is necessary to bring up the relevant content of Announcement No. 1 again. If you meet the conditions and did not declare deduction of expenses during the previous final settlement and payment of business income, you still have time to correct the declaration together with the final settlement and payment of comprehensive income before June 30.
I. Policy Content
According to Article 4, Paragraph 2 of the "Announcement of the State Taxation Administration on Handling Matters Related to the Final Settlement and Payment of Individual Income Tax for Comprehensive Income in 2021" (State Taxation Administration Announcement No. 1 of 2022): Taxpayers who simultaneously obtain comprehensive income and business income may declare a deduction of 60,000 yuan for expenses, special deductions, special additional deductions, and other deductions determined in accordance with the law in their comprehensive income or business income, but may not declare deductions repeatedly (hereinafter referred to as Announcement No. 1). This measure, at the operational level, solves the obstacle in terms of individual income tax expense deductions for groups whose main source of income is business income but also obtain comprehensive income after the revision of the "Implementation Regulations of the Individual Income Tax Law" in 2018.
II. Origin of the Problem
In August 2018, the Individual Income Tax Law underwent major revisions, raising the threshold from 3,500 yuan per month to 60,000 yuan per year, and adding multiple special deductions and special additional deduction items; the four types of income, namely wages and salaries, income from labor services, income from royalties, and income from the use of franchise rights, were incorporated into comprehensive income and subject to a progressive tax rate of 3%-45%, calculated and taxed on a consolidated basis for the tax year. The original production and business income of individual industrial and commercial households was renamed business income, and the tax calculation method continued with a progressive tax rate of 5%-35% for annual settlement and payment.
Before the new Individual Income Tax Law came into effect on January 1, 2019, wages and salaries, income from labor services, income from royalties, income from the use of franchise rights, and production and business income were all calculated separately, and only wages and salaries and the production and business income of individual industrial and commercial households were allowed to deduct 3,500 yuan per month. Since wages and salaries and production and business income are mutually exclusive in terms of how they are obtained, it is generally not the case that both wages and salaries and production and business income are obtained. Therefore, there is generally no need to worry about where to arrange the deduction of expenses. Even if it does occur, both types of income can be deducted according to law, and choosing one to deduct solves the problem.
After the revision of the new Individual Income Tax Law, the four types of income, namely wages and salaries, income from labor services, income from royalties, and income from the use of franchise rights, which also reflect the results of individual physical, intellectual, skill, and knowledge labor, are combined into comprehensive income. The income obtained annually is deducted by a basic expense of 60,000 yuan and various special and additional deduction expenses, which is used as the taxable income to calculate individual income tax. This changes the previous situation where only wages and salaries and production and business income could enjoy deduction expenses, so that more similar labor income can fairly enjoy the individual income tax deduction dividend given by the state, which is a more scientific and reasonable design. Then, as long as the business income, which has been renamed, is re-clarified with the new deduction standard according to the previous regulations, everything will be fine.
I specifically consulted the "Implementation Regulations of the Individual Income Tax Law (Revised Draft for Solicitation of Comments)" issued by the Ministry of Finance and the State Taxation Administration on October 20, 2018, in which Article 15 stipulates: The balance of the income of individual industrial and commercial household owners, individual sole proprietorship enterprise investors, partnership enterprise individual partners, and individuals engaged in other production and business activities from individual industrial and commercial households, individual sole proprietorship enterprises, partnership enterprises, and other production and business activities in each tax year, after deducting expenses of 60,000 yuan, special deductions, and other deductions determined in accordance with the law, shall be the taxable income. In the "Explanation of the Revised Draft for Solicitation of Comments", Article 15 is expressed as follows: In 2000, the State Council decided not to levy enterprise income tax on individual sole proprietorship enterprises and partnership enterprises, but only to levy individual income tax on their owners and individual partners. This revision of the implementation regulations clarifies that the income obtained by individuals through individual sole proprietorship enterprises and partnership enterprises is included in business income. At the same time, in accordance with the provisions of the new tax law, the income obtained by individuals through contracting, leasing, subcontracting, and subletting is included in business income. In addition, considering that the current policy stipulates a deduction of 42,000 yuan per year for production and business income, and the new tax law raises the basic deduction standard for individual comprehensive income to 60,000 yuan per year, in order to maintain policy coherence, it is stipulated that the business income of individual industrial and commercial household owners, individual sole proprietorship enterprise investors, partnership enterprise individual partners, and other individuals engaged in production and business activities shall be the taxable income after deducting expenses of 60,000 yuan, special deductions, and other deductions determined in accordance with the law.
That is to say, the design of Article 15 of the "Implementation Regulations of the Individual Income Tax Law (Revised Draft for Solicitation of Comments)" by the Ministry of Finance and the State Taxation Administration integrates the new standards on the basis of inheriting the original regulations, taking into account both the historical evolution and closely following the development of the situation, and has both the principles and flexibility of tax legislation. However, two months later, the "Implementation Regulations of the Individual Income Tax Law" was officially promulgated, and Article 15 did not include the relevant content of the revised draft, but added a statement that subverted the tradition (hereinafter referred to as Paragraph 2 of Article 15 of the Regulations), that is: Individuals who obtain business income and do not have comprehensive income shall deduct expenses of 60,000 yuan, special deductions, special additional deductions, and other deductions determined in accordance with the law when calculating their taxable income for each tax year.
III. Impact
Paragraph 2 of Article 15 of the Regulations has been controversial since its promulgation. Previously, individuals who obtained production and business income could basically deduct the prescribed expenses in the production and business income, even if they had other income, unless you didn't want to deduct it here, at least you had a choice. But after such a change, it is clear how to deduct for those who only obtain business income, but it is not said how to deduct for those who obtain both business income and comprehensive income. Therefore, we can only follow the provisions of Paragraph 1 of Article 6 of the "Individual Income Tax Law" and deduct the prescribed expenses according to the comprehensive income obtained. What's even worse is that the new comprehensive income not only includes wages and salaries, which are mutually exclusive with business income, but also includes income from labor services, income from royalties, and income from the use of franchise rights. These three types of income often coexist with business income, so there is a series of problems such as no choice and insufficient deduction, which makes some groups who mainly rely on business income and supplement with other income, and cannot achieve assessed taxation, restless.
Taking a partner of a law firm as an example, the law firm pays him a "salary" of 5,000 yuan per month, obtains a legal income of 264,800 yuan for the whole year, and bears a loss of 10,000 yuan for the law firm's annual expenses. The partner has a basic deduction of 60,000 yuan and special deductions such as children's education, subsequent education, and support for the elderly of 64,800 yuan. As introduced in the previous article "How Should the Taxpayer Identity of a Law Firm Be Determined", a law firm is considered a partnership enterprise or an individual sole proprietorship enterprise in tax law. Therefore, whether the partner obtains a "salary" or a "case handling commission", as long as the income comes from the law firm, the amount of income must be determined according to the principle of "taxation after distribution", and then the individual income tax is calculated and paid according to the business income.
Scenario 1: According to the above situation, since the partner only has income from business operations, according to Article 15, Paragraph 2 of the regulations, it belongs to the situation where there is no comprehensive income. Therefore, the basic deduction of 60,000 yuan and the special deduction of 64,800 yuan should be deducted when calculating the taxable income, that is (0.5×12)+26.48-1-6-6.48=190,000 yuan, and the annual individual income tax payable is (190,000×20%)-10,500=27,500 yuan.
Scenario 2: The partner received a royalty of 100 yuan for publishing an article in a certain publication, and 80%×70%=56 yuan of the royalty income is included in the comprehensive income. At this time, according to the regulations, once comprehensive income is obtained, all expenses can only be deducted from the comprehensive income. Although the comprehensive income is only 56 yuan, which is far from enough to deduct the expenses of 6+6.48=124,800 yuan, according to the consistent provisions of China's individual income tax, it can only be deducted from one source of income, and it will be useless if it is deducted to zero. There has never been a provision to split the deduction expenses, deduct a little here, and leave the undeducted part to deduct from other income. Therefore, it appears that 124,800 yuan of deductible expenses that could have been enjoyed are wasted due to the 56 yuan royalty.
At this time, let's look at the tax burden. The annual individual income tax payable consists of two parts: comprehensive income and business income. The comprehensive income is: 0.056-12.48=-124,240 yuan. Since it is a negative number, the tax payable is 0; the business income is (0.5×12)+26.48-1=314,800 yuan, and the individual income tax payable is (314,800×30%)-40500=53,940 yuan.
By comparison, it can be seen that Scenario 2 has a few dozen yuan more in royalties than Scenario 1, resulting in the waste of more than 100,000 yuan in deductible expenses, which ultimately leads to a 96% increase in the tax burden. Similarly, similar situations will occur when business income is the main source and labor remuneration and royalties are obtained.
Then some people say, wouldn't it be okay not to have these 56 yuan, but if it's not 56 yuan, but 5,600 yuan or 56,000 yuan, wouldn't you feel bad! Of course, it's a different story if you have achieved financial freedom and your comprehensive income has exceeded the deduction amount. Moreover, sometimes you don't even know what kind of income it is. For example, lawyers often receive training and lecture fees, sometimes as part of legal services from consulting units, which are sent to your card by the finance department as production and operation income, and sometimes from temporarily contacted non-consulting units, which deduct individual income tax according to labor income and then transfer the lecture fees to your card. At this time, the individual income tax APP has already recorded a sum in the comprehensive income. You thought you didn't get any income other than business income, and you will be dumbfounded when you settle the tax in the second year.
Postscript
Announcement No. 1 used the power of a tax regulatory document to reverse the provisions of Article 15, Paragraph 2 of the regulations, a tax administrative regulation. Law firm partners can finally choose to deduct the prescribed expenses from their business income and feel at ease in obtaining comprehensive income such as lecture fees, review fees, and royalties. However, as a legal professional, in addition to feeling happy, there is also a faint worry that Article 15, Paragraph 2 of the regulations hanging over their heads will jump out and cause trouble again one day. Therefore, they repeatedly looked for legal support for Announcement No. 1 in the current individual income tax laws and regulations, and finally found some relevant content in the Implementing Regulations of the Individual Income Tax Law, namely Article 25, Paragraph 3, "The specific measures for settling and paying comprehensive income shall be formulated by the tax authorities under the State Council" and Article 27, "The specific measures for the place where taxpayers file tax returns and other relevant matters shall be formulated by the tax authorities under the State Council." It is hoped that these authorizing regulations will allow the State Taxation Administration to carry the banner of correcting Article 15, Paragraph 2 of the Implementing Regulations of the Individual Income Tax Law through Announcement No. 1, and continue this provision for the 2021 tax year in the subsequent annual individual income tax settlement matters.