A few questions about Koshin Jigyo’s

[ilovejesusandgod]

1. Is there a limit to the number of Koshi Jigyo's that can be established by a single person?
2. Am I correct in understanding that business expenses from one break-even/in-losses KJ can be deducted from the taxable income another KJ?
3. If goods were purchased, e.g. hardware, prior to establishing a KJ to start generating income, would there be any way to deduct these expenses or do they need to be purchased after establishing KJ?
4. HYPOTHETICAL: Could I start a KJ in September 2021, purchase hardware with scope to run a small business, then declare my expenses as an overall loss even though no income was made this year as it would take 6 months or so to start generating income upon the next financial year. And then deduct the losses from the current year from next year’s tax bill?
5. Does a KJ need to have a specific motive for existence? E.g. Would it be possible to run separate websites/blogs/stores that operate in different fields and have them exist under one 'umbrella' KJ?

Thanks

 

[kristhuy]

@ilovejesusandgod

Is there a limit to the number of Koshi Jigyo's that can be established by a single person?

A kojin jigyo (個人事業) is not a legal entity, so this question is kind of irrelevant. Any individual can engage in multiple business activities, so I guess the answer is that there is no real limit. But at some point additional business activities may become "miscellaneous income", rather than "business income", because the operator is not spending enough time on them.

business expenses from one break-even/in-losses KJ can be deducted from the taxable income another KJ?

A KJ is not a legal entity, so the answer kind of has to be yes. All your KJ income is "business income" (providing it qualifies as business income), so it is all taxed together.

would there be any way to deduct these expenses or do they need to be purchased after establishing KJ?

A KJ is effectively "established" as soon as you decide that it is. There is no formal process of "establishing" a KJ because it is not a legal entity. If I intend to buy an excavator tomorrow because I intend to run an excavating business, then I can say I "established" a KJ today, without submitting any paperwork. Though it is worth noting that you are supposed to notify your local NTA branch office within one month of starting a new business.

deduct the losses from the current year from next year’s tax bill?

As long as you register as a blue-filing business, then yes, this is relatively easy. You can achieve something similar without registering as a blue-filing business (by using the concept of 開業費), but it is more complicated.

Does a KJ need to have a specific motive for existence?

I'm not sure about a motive, but it does need a "field of operation", because the local business tax rate varies depending on the field. But in general there is no problem with engaging in a variety of business activities under the same umbrella. If this is not just a theoretical question, though, I would strongly encourage you to seek professional advice.

 

[reflectionsbythewater]

@kristhuy This is all great, and I would like to add that depending on what the "hardware" is and how much it costs, it may have to be capitalized and depreciated. You might not be able to expense it all in the first year.

 

[ilovejesusandgod]

@reflectionsbythewater Thanks for highlighting this. I've followed up with looking at the blue form returns and the limit to expenses that can be deducted without them becoming assets.

Out of curiosity however, what exactly stops expenses from being deducted and then being sold later on outside of the business?

Say a computer was purchased for an amount that could be tax deducted, and then later resold as a second hand item in a private capacity.

Or perhaps a computer purchased during a financial year was damaged and unusable thus requiring the purchase of a second item that would 'on paper' constitute being used for the same purpose. I can see how it may look dodgy to the tax office. I assume the individual must provide detailed proof on the actions and intentions leading to each purchase?

 

[kristhuy]

@ilovejesusandgod

what exactly stops expenses from being deducted and then being sold later on outside of the business?

Nothing, but any difference between the depreciated value of the asset and the sale price will generally be taxable as capital gains (not business income). So, for example, if you buy a 500k asset that has a statutory life of 5 years, then after two years the depreciated value of the asset will be 300k, so if you sell the asset for 350k, the 50k difference is a taxable capital gain. There is an exception to this principle for low-value assets, though. The topic of individuals selling business assets is discussed in more detail here and here.

 

[ilovejesusandgod]

@kristhuy

But at some point additional business activities may become "miscellaneous income", rather than "business income", because the operator is not spending enough time on them.

Say I have a registered KJ for Cryptocurrency trading that has a taxable income of 6 million yen. I also have a registered KJ for a blog/website/social media presence that operates at a minimal profit / loss but each expense has a clear intention for income generating activities with proven records of content creation, value production and economic intent. The losses from the 2nd are deducted from the profits of the 1st. Do you see this as a viable strategy that would be accepted by the tax office? I understand it is a grey area and highly specific case but I am also under the impression that as far as all business activities are justified and accounted for accordingly such a route could be taken.

Then there is the case of common sense in business. If one was to operate a 2nd KJ for the sake of tax deductions due to expenses/losses, without real cause for concern if this business itself was profitable (with the main cause for concern being on the profits of the other registered KJ), would this then cause the income to be deemed as miscellaneous instead? **Of course the 2nd KJ would be intended to become a successful high income business activity in the long term - but I am writing this in the perspective of the tax office observing my business activities.

(Referencing this article https://www.biz.ne.jp/matome/2003762/ )

I'm not sure about a motive, but it does need a "field of operation", because the local business tax rate varies depending on the field.

Do you know of any resources that explores this in detail? E.g. types of fields and their associated tax rates.

 

[kristhuy]

@ilovejesusandgod

Do you see this as a viable strategy that would be accepted by the tax office?

It basically depends on the "seriousness" of the loss-generating enterprise. If you are spending significant amounts of time on it (20+ hours/week, for example) and there is a clear path to profitability, then the losses may constitute "business losses", meaning that they can offset the income generated by your profitable business.

But if it looks like the loss-generating enterprise is more like a hobby/side-project from which you are seeking to harvest losses for tax reduction purposes, then the losses are likely to constitute "miscellaneous losses", in which case they cannot offset the income generated by your profitable business.

would this then cause the income to be deemed as miscellaneous instead?

Yes, this is the primary way in which the tax system regulates the deliberate creation of taxable losses. If it doesn't look like you are genuinely taking the profitability of the business seriously, the losses become "miscellaneous losses", which significantly reduces their capacity to provide tax advantages.

Do you know of any resources that explores this in detail?

Business tax is a prefectural tax so you should check the website of the relevant prefecture, but as an example, here is the list for Tokyo. As you can see, the rate for most types of businesses is 5%. Though it is worth noting that business tax is a deductible expense.

 

[ilovejesusandgod]

@kristhuy

Though it is worth noting that business tax is a deductible expense.

When calculating business tax, residence tax and NHI contributions, are the 3-5%, 10% and approx 10% respective rates based on taxable income minus both the personal exemptions (¥480,000 / ¥430,000 for residence tax) and income tax bracket exemptions (e.g ¥427,500 in the 3.3-6.95m bracket) in the same way gross national tax liability is calculated?

Are health insurance and pension contributions tax deductible for self-employed persons in the same way as business tax?

And aside from business expenses/deductions and the blue-filing deductions are there any other major significant tax strategies to be aware of?

 

[kristhuy]

@ilovejesusandgod

are the 3-5%, 10% and approx 10% respective rates based on taxable income minus both the personal exemptions (¥480,000 / ¥430,000 for residence tax)

The deductions from net income to produce taxable income are different for all three taxes, and all three are different to national income tax. I'm not going to list the dozens of possible deductions and say which taxes they each apply to, especially since there can be variations in local tax calculation methods between prefectures and municipalities. NHI calculations, in particular, vary enormously between municipalities.

In general, however:

• NHI premiums are based solely on your net income minus the 430k basic deduction. No other deductions are recognized. (Though the blue-form deduction, for example, is technically a business expense, so it does reduce your net income for NHI purposes.)
• Residence tax allows for most of the same deductions from net income as income tax, but with different amounts in many cases (e.g., a 430k basic deduction instead of 480k).
• Business income has its own separate deduction structure, as described at the page I linked. Most significantly, there is a 2.9 million yen deduction applied to the taxpayer's total business income.

income tax bracket exemptions (e.g ¥427,500 in the 3.3-6.95m bracket)

I'm not sure you've understood what those "exemptions" are. The 427,500 yen amount, for example, is not an exemption, it's just the number you need to use to quickly simulate the application of marginal taxation.

The "proper" way to apply Japan's marginal income tax rates to an income between 3.3 million and 6.95 million would be to take 5% of 1.95 million and add that to 10% of (3.3 million - 1.95 million) and add that to 20% of the amount in excess of 3.3 million. But the same result can be reached by just taking 20% of the total amount and subtracting 427,500. They are two different ways of producing the same result, with the second way being much faster (though less intuitive).

There is no need for any such shortcuts when applying tax rates that are not marginal. And none of the local taxes you are discussing use marginal tax rates.

Are health insurance and pension contributions tax deductible for self-employed persons in the same way as business tax?

Yes, but not in the same way. Health insurance and pension premiums are deemed to be paid by the individual in their private capacity, not in their capacity as a business operator. So they are not deductible business expenses. However, health insurance and pension premium payments are tax deductible for individuals.

are there any other major significant tax strategies to be aware of?

None that come to mind. But what I would say is that professional advice can be extremely valuable when starting a new business. New businesses have a high chance of being audited, and a professional can make sure you are on the right path from the beginning.

 

[flypentop]

@ilovejesusandgod

If goods were purchased, e.g. hardware, prior to establishing a KJ tostart generating income, would there be any way to deduct these expensesor do they need to be purchased after establishing KJ?

You should get advice specific to your case, but FWIW, my accountant encouraged me to deduct expenses related to starting up my business activity, that were incurred before the establishment date which I submitted on the blue form.

In my case though, those expenses were pretty nominal so would be unlikely to raise suspicions. If you expect significant investment into HW, probably better to submit blue form soon.

 

[ilovejesusandgod]

@flypentop Apologies if I am too intrusive, but could you give me some scope of expectations of what accountancy fee's are like in Japan for a KJ business operation?

Also would said accountancy fees be tax deductible as an expense from the business?

 

[flypentop]

@ilovejesusandgod

Apologies if I am too intrusive, but could you give me some scope of expectations of what accountancy fee's are like in Japan for a KJ business operation?

Roughly JPY 45,000 p.a. but this is a minimalist consulting operation with no products, inventory, etc. and it sounds like you have something more complex.

• Freee スタータープラン: JPY 13,000 a year
• My assistant: JPY 22,000 a year? (10 hours @ 2,200/hr) does the Freee input and operation, tax declaration, etc. for me. She does other work for me as well so I don't have an exact allocation of her time for accounting vs. the other stuff, hence the guessed number
• One-off consultations with accountants (roughly JPY 10,000/hour) as needed, maybe once a year on average.

Also would said accountancy fees be tax deductible as an expense from the business?

Yes

 

[imumi01]

@flypentop I'm very interested in finding a good accountant for short consultations/questions only. I don't need the full package. It has been hard to find. Any recommendation by any chance?

 

[flypentop]

@imumi01 I have used a different accountant each time for that, since I could generally get my concerns answered but none of them really wowed me. So next time I'd probably try a different one again to see.

Since my Japanese language ability is pretty mediocre and I have some business interests in the US, I also contacted a few firms that position themselves as covering both markets. My experience with 4 such firms:

• 2 never responded to initial inquiry
• 1 quoted me a price of 10man+ for an initial consultation. My expectation had been ca. 10,000/hour, maybe paying some premium for the international angle and English service. I think they are aiming for a certain sort of business customer, but for my simple kojin jigyou needs, this seemed like too much. Maybe this is why the first two ignored me, if they perceived me as being too small to be of interest.
• 1 eventually I had a consultation (10,000/hour), but the accountant didn't actually seem all that familiar with the US tax law and didn't understand my questions well. I guess you get what you pay for.