Business profit is defined as profit arising from commercial or industrial activities. Although this definition is very comprehensive and includes all types of commercial and industrial activities, the PIT Law excludes some activities from the contents of business profits. Generally, activities performed by tradesmen and artisans who do not have permanent establishments are not assumed as commercial and industrial activities, and so they are exempt from income tax.
Furthermore, in order to tax income resulting from commercial and industrial activities there has to be continuity in performing these activities. In other words, incidental activities in that nature are not treated as commercial or industrial activities and therefore, the PIT Law regulates these activities as the other income and earnings. The PIT Law does not list each commercial and industrial activity and only refers to the Turkish Commercial Law for the scope of these terms. However, several activities are listed namely for clarification in Article 37.
These are as follows:
– Operating mines, stone and lime quarries, extraction of sand and pebbles, operations of brick and tile kilns,
– Stock brokerage,
– Operating private schools, hospitals and similar places,
– Regular operations of sale, purchase and construction of real estate,
– Purchase and sale of securities on someone’s behalf and on a continued basis,
– Fully or partly sale of land which has been obtained by purchase or barter and subdivided within 5 years of its date of purchase and sold during this period or in subsequent years,
– Earnings from dental prosthesis.
Basically, the taxable income of a business enterprise is the difference between its net assets at the beginning and at the end of a calendar year.
Two methods are used to compute business profits: Lump-sum basis and actual basis.
In the former method, the PIT Law specifies estimated business profits for taxpayers who are qualified for such treatment according to the relevant provisions of the Law. The main assumption is that those taxpayers specified by the Law have difficulty to keep accounting books and to determine the income on the actual basis. Therefore, their income taxes are assessed on their estimated profits determined by the Law.
In the latter method business profits is determined on the actual basis: Taxpayers are required to keep accounting books to record their actual revenues and expenses which occur within the calendar year. In general, business related expenses paid or accrued related to business are deducted from revenues.
Expenses to be deducted:
In order to determine net amount of business profits on the actual basis, the following expenses may be deducted from revenues:
– General expenses made for earning and maintaining business profit,
– Food and boarding expenses provided for employees at the place of business or in its annexes,
– Expenses for medical treatment and medicine,
– Insurance and pension premiums,
– Clothing expenses paid for employees,
– Losses, damages, and indemnities paid based upon written agreements, juridical decrees, or by the order of law,
– Expenses for travel and lodging relevant to the business,
– Expenses for vehicles which are part of the enterprise and used in the business,
– Taxes in kind such as building, and consumption, stamp and municipal taxes and fees and charges, related to the business,
– Depreciations set aside according to the provisions of the Tax Procedure Law,
– Payments to the unions,
– The contribution payments paid by the employers to the retirement system on behalf of the wage earners. (Total contribution payments paid to the individual retirement system by the employers and the wage earners and considered in the determination of tax base, shall not exceed the rate and limits indicated in paragraph (3) of first subsection of Article 63 of the PIT Law),
– The production cost of foodstuff, cleaning, clothing and heating supplies donated to the charity and foundations operating to help the poor, within the procedures and principles set out by the Ministry of Finance.
Payments which are not accepted as expenses:
Those payments listed below are not considered as deductible expenses;
– Funds withdrawn from the enterprise by the owner or by his spouse or children, or other assets in kind acquired by them,
– Monthly salaries, wages, bonuses, commissions and compensation paid to the owner of the enterprise, to his spouse, or his minor children,
– Interest on the capital invested by the owner of the enterprise,
– Interest based on the current account of the owner of the enterprise, his spouse, his minor children including interests on all form of receivables,
– Excluding the transactions mentioned in paragraphs 1 and 4, in case the entrepreneur purchases or sells commodities or services based on the charges or prices he determines with the associated bodies contrary to the principle of conformity with the market rates, the differences between the charges or prices in conformity with the market rates and those applied by the entrepreneur that materialize to the disadvantage of the enterprise are considered to have been withdrawn from the enterprise,
– All fines and tax penalties as well as indemnities arising from unlawful actions. Indemnities incurred as penalty clauses of contracts shall not be considered indemnities of a punitive nature,
– 50% of the advertising expenses for all kind of alcohol and alcoholic beverages, tobacco and tobacco products (current rate has been reduced to 0% by a Governmental Decree. The Council of Ministers shall be authorized to raise this rate up to 100% and reduce it to 0%),
– Depreciation and expenses of motor-driven sea crafts such as yachts, cutters, boats, speed boats and aircrafts such as airplanes and helicopters acquired by renting or registered in the establishment not related to the main field of operations of the enterprise,
– Expenditures related to indemnities paid against material and moral damages arising from acts through press or radio and television broadcasts.
Source: Revenue Administration
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