What is a small business corporation?

A small business corporation (SBC) is a company which meets various requirements set out per the Income Tax Act.

Small business corporation tax is the type of income tax that is levied on companies registered as a small business corporation.

It is intended to promote and assist small businesses, which are crucial for the economy and job creation. There are multiple tax benefits available to small business corporations. These benefits are structured in a way that means less tax paid in the beginning of the businesses’ life span – which can be the most challenging years for a new business.

What type of entities can qualify as a small business corporation?

Any private company, closed corporation, cooperative, even a personal liability company can qualify as a small business corporation if they meet the below requirements.

What are the requirements in order to qualify as a small business corporation?

All of the below requirements must be met to qualify as a small business corporation.

• Gross income for the year of assessment less than R20 million;
• All shareholders in the company or members must always during the financial year be individuals or natural persons;
• No shareholders or members may hold any shares or have any interest in the equity of another business other than:
  • Investment in a company that is in the process of being wound up;
• Investment income and rental income should not consist of more than 20% of the company’s total receipts, and
• The company should not be a personal service provider.

The requirements should be reviewed annually to ensure that the company still meets the requirements. A company that subsequently fails to meet the requirements in later years of assessment will no longer be classified as a small business corporation and will be taxed the same as a standard company.

What are the tax benefits of being a small business corporation?

• The biggest advantage is the lower tax rate – while companies are taxed at a standard rate of 27%, small business corporations are taxed on a sliding scale, see table below. The impact of this reduced tax rate is reliant on the taxable profit produced during the financial year.

Tax table for small businesses for year of assessment ending on any date between 1 April 2024 and 31 March 2025:

• Accelerated capital allowances against assets purchased for company, which allow for a larger allowance than wear and tear.  Such as 100% allowance on assets used in a process of manufacture and for non-manufacturing assets a 50%/30%/20% allowance over three years.

In summary, small business corporations receive additional tax benefits under the Income Tax Act to support their growth. These benefits include lower tax rates based on specific criteria like gross income and shareholder composition. Small business corporations play a vital role in fostering entrepreneurship and job creation but must meet eligibility requirements to retain these advantages.

Do you need assistance with Income Tax or any other SARS compliance? Contact Dale Petersen on 021 819 7802 or at dpetersen@wauko.com to connect with us.