You have decided to stop your sole proprietors, which means you still need to put an amount of things in order. One of those steps is getting your investments and associated vAT in order. This is important, because the tax authorities may carry out a cessation audit, during which they will check whether, on the one hand, you have rectified the VAT recovered on your investment and, on the other hand, correctly set off any residual value of your investments. In this blog, we discuss some key points on how you should treat ongoing depreciations if you decide to stop your sole proprietors.
Current investments vs fully depreciated investments
In running your business, you have had to purchase a lot. Maybe you needed a computer or an expensive machine? These more expensive purchases are investments that you had to write off over a number of years. When you decide to stop doing business, some of those investments will have already been written off, while some still need to be written off over a number of years.
Did you know?
If an investment has not yet been fully written off then you have not yet put in the full purchase value as a cost. Be sure to also view everything you need to know about depreciation in a sole proprietors business!
Market value as a starting point when quitting
When you stop your sole proprietorship, it is necessary to sell all investments ‘to yourself’ at market value. Determining the market value can be done through second-hand sites, for example, where you can get a realistic picture of the current value of your assets. You then sell the investment to yourself by effectively creating a sales invoice.
No payments have to be made to yourself in a sole proprietor, but by creating that sales invoice, you correct what is needed in the accounts.
But my investment isn’t worth anything anymore?
If there are ongoing depreciations on investment that is broken or no longer functional, the market value is considered zero.
Is the residual value equal to the market value?
For example, in case you have a smartphone whose depreciation period is three years and you decide to stop after one year, the residual value will be 2/3 of the original value. One year has been depreciated, which makes the residual value 2/3, so the accounting records show the residual value.
That same 2/3 could be a realistic market value. So that is the selling price you would charge if you sell at a market price.
Capital gain on sale
When selling property, such as a house, there can be capital gains. This is one reason why accountants often advise against including a house in the business.
The residual value shown in your accounts is only 20/30ths after 10 years (depreciation at 30 years). But the market value of the house has presumably increased after 10 years.
The difference between this market value (sales value) and the residual value in your accounts is additional taxable income for your sole proprietors. So that can be a spicy amount that will be taxed extra that way.
Tips for ending your sole proprietorship 🙌
- Keep all supporting documents: It is essential to keep all relevant documents that can prove that you have taken reasonable steps to terminate ongoing expenses and liabilities.
- Consult with your accountant if necessary: Make sure you go through all the necessary steps with your accountant, such as how to make the most of deductible expenses after termination and how to properly treat undepreciated investments.
- Be careful about capital gains: In case of sales of assets, such as property, be aware of the possible taxes on capital gains.
