Is Saving on Taxes Via a Second Job Permitted?
Introduction
Due to work-style reform and other factors, more companies are allowing employees to take on side jobs, and more people are starting to do such jobs. However, it is very risky to do a side job that is recognized as being done from the start for tax-saving purposes.
Concerning Taxation When One Has a Second Job
Regarding second jobs, people may work at other companies as employees, carry out sole proprietorships via online businesses, etc. In the former case, the income a worker gets from the company corresponds to his/her employment income. On the other hand, there are two types of income in the latter case - business income and miscellaneous income. When one gets a salary from a second job, there is no way to save on taxes, so there basically is no disagreement about this. Since the worker gets compensation from two places, it is only necessary for him/her to file a tax return including both sources.
Problems may arise when the second job is a sole proprietorship. If the income thus generated corresponds to ‘business income’, it is possible to offset a business loss against other income. By combining the loss generated by the person’s side business and their main employment income, they can get a refund of at least some of their income tax, and a reduction in their residence tax. However, if a business-generated loss falls under the category of ‘miscellaneous income’, the operator cannot offset such a loss against their main income. Because the loss cannot be totaled together with their other income, it won’t be possible for the person to get a refund of that share of their income tax, nor a reduction in their residence tax.
It’s Not Easy to Get a “Business Income” Designation
As described above, if a person declares their side job as business income, and if the business ‘income' is actually a loss, they can combine that loss with their employment income to save on taxes. How is this possible? In order to determine that one’s personal business income corresponds to ‘business income’, not ‘miscellaneous income’, the person needs to make a comprehensive evaluation based on various items, such as the following:
- Whether the economic activity is for profit or for compensation
- Presence or absence of continuity/repetition
- Whether or not plans can be carried out at one's own risk, according to one's own planning
- The degree of mental and physical effort expended on the economic activities
- Availability of human and physical resources/capacity
Besides earning a steady income from one’s main job, anything done with little time and effort is basically not considered to be ‘business income’. A side job that is actually intended to save on taxes is also treated as miscellaneous income, not business income.
If the taxpayer’s side business is a sole proprietorship, there are cases where personal expenditures that are not related to the business are treated as business expenses. However, if the side business is continuously losing money, it is extremely likely that it will be classified as generating ‘miscellaneous income’.
When the tax filer has a day job and runs a sole proprietorship, the hurdle for getting their business designated as generating business income is higher than they might think.
Submission of a Notification of a Business Opening is Irrelevant
It is not at all true that if a person submits a "notification of business commencement" or an "application for approval of a blue tax return" when they start their side business, that resulting income will necessarily be recognized as business income. Please note that just because these documents are accepted does not mean that the tax office has accepted a designation of “business income”.
Internet Banking Also Corresponds to Electronic Transactions
Introduction
From January 1, 2022, electronic data storage is necessary when an invoice or receipt is sent as a PDF file. The use of internet banking is also handled in the same way. Due to COVID-19, more companies are making transfers and other payments using online banking. You should take notice of the new rule if you use Net banking from January 1, 2022.
Online Banking Transaction Information is Subject to Data Storage
On and after January 1, 2022, for "electronic transactions" where "transaction information" (such as purchase orders, contracts, receipts, and price quotations) is exchanged via electromagnetic means, the transaction information must be stored in electronic data format, in a way which meets search criteria.
Electronic transactions also include Electronic Data Interchange (EDI) transactions, and Internet banking falls under the category of EDI transactions.
Many people question whether the screen result of an Internet banking transfer, etc. corresponds to transaction information for electronic transactions.
In this regard, since the Internet banking system falls under the category of EDI transactions, screens displaying information such as "payee name," "amount," and "date and time," which are equivalent to the receipt received when making a transfer at a bank counter, will need to be stored as electronic data of the electronic transactions.
In such cases, it is necessary to satisfy requirements such as search requirements. As a simple method, it is permitted to store the information in a certain way, such as entering the date, the recipient, and the amount of money in the name of a file that has been converted into data, such as downloaded data or a PDF file.
Note that Outputting Documents in Paper Format is Allowed
The revised electronic transaction system, which will become effective from January 1, 2022, requires electronic data to be stored for electronic transactions. As long as electronic data is stored, it is permitted to print it out for accounting and other purposes.
This point seems to be misunderstood by some. Therefore, it is not necessary to go completely electronic from January 2022, and of course it is acceptable to continue to use paper-based documents for internal accounting processing and communication with tax accountants and CPAs. Although electronic data storage will now be required, in order to meet the search feature requirement (which is a bottleneck in the revised electronic transaction system), it is possible to use spreadsheet software such as Excel, without utilizing a document management system with search functions.
In addition, regarding tampering prevention measures, it is not always necessary to add a time stamp to the documents, and it is also allowed to set up "administrative rules for prevention of correction and deletion," which is relatively easy to implement from a cost perspective.
Due to time and budget constraints, in many cases it may be difficult to deal with this matter by January 2022. However, during the transition period until preparations for the system and company-wide operations are completed, a realistic solution may be to continue with paper-based accounting operations, while only data retention is carried out utilizing electronic data storage, via a simplified method.
How Can You Protect Your Company?
Introduction
If a company’s shares are 100% owned by its president, minority shareholder issues basically do not arise. However, in reality, many companies seemingly have minority shareholders. Do you know what your company's "regulations regarding restrictions on the transfer of shares" are? What can you do to prevent your company's shares from being sold to “undesirable shareholders”?
In the next couple sections, we will discuss countermeasures against problematic actions by minority shareholders.
What are Restrictions on Share Transfers?
Generally, a privately-held company will have a provision in its articles of incorporation regarding restrictions on the transfer of shares. This is a provision that prevents the company's shares from being bought and sold without permission. As an example, let’s suppose that the shareholder composition of company A is: 80% owned by president B, and 20% owned by former senior executive C.
If there are no restrictions on the transfer of shares in Company A, a situation could arise where Mr. C sells Company A shares to antisocial forces without the knowledge of Company A or Mr. B. In order to prevent such a situation, it is necessary to have a provision that prevents the sale of Company A shares to antisocial forces. In order to prevent this from happening, it is common to stipulate that the approval of the general meeting of shareholders or the board of directors must be obtained before a sale or purchase.
Recently, lawyers have been engaged in activities such as buying shares from minority shareholders with the aim of "protecting the rights of minority shareholders," so companies that do not have restrictions on transfers should be especially careful.
The Grace Period is Two Weeks
So, do restrictions on transfers of shares totally secure your company from such risks? Unfortunately not. In the above example, if Mr. C is going to sell his shares in Company A to his friend Mr. D, and Company A objects to it, it is necessary for the company to notify Mr. C within two weeks from the date of his request for approval of the transfer that: ① Company A will not approve the transfer to Mr. D; and ② someone else (a designated purchaser) will purchase the shares instead of Mr. D.
Though it is a short period of two weeks, after this time, the transfer will be "automatically approved”. The agency/organization that decides whether or not to approve the transfer is prescribed in the articles of incorporation or in the company register. Generally, it should be the board of directors if the company has a board of directors, or, if it doesn’t have a board, then a general shareholders meeting.
However, it takes one week to convene a meeting when a general meeting of shareholders or a meeting of the board of directors is designated as the body/agency for approving transfers. Convening such a meeting takes a week, but the resolution of disapproval, the selection of the designated purchaser(s), and the notification of these matters also must be completed within the limited two-week period.
Have a Representative Director Be the ‘Transfer Approval Agency’?
Because of the short two-week period and the lack of flexibility in making a resolution at a general meeting of shareholders, etc., some companies designate a "representative director" to act as the ‘transfer approval agency’.
However, there are some risks with this, and even scholars are divided about the pros and cons of doing so. Even if your company went to court regarding having a representative director act as an ‘agency’ to approve such transfers, it is said that the odds of winning the case would be just 50-50.
If your company lost in court, it would be judged that you did not give proper notice of your disapproval within two weeks. As a result, the “unwanted shareholder(s)” would be approved.
Even though the notice must be given in a short period of time (two weeks), and the representative director being designated the ‘transfer-approving agency’ is done to increase flexibility, doing so may actually end up being a risk.
