Business means independent economic or professional activities of a person (incl. the professional activity of a notary, bailiff and sworn translator and the creative activity of a creative person), the aim of which is to receive income from the production, sale or intermediation of goods, provision of services or other activities, incl. creative or scientific activity.
- Income derived from business is declared on form E.
- Form E is submitted together with the form A of the income tax return of a natural person by 31 March of the calendar year following the period of taxation (calendar year).
- Sole proprietors are required to submit an income tax return even if they did not receive any business income at all or if the income was smaller than the basic exemption.
- Both form A and form E may be submitted either through the e-Tax Board/e-Customs or on paper.
- Submission of income tax return through the e-Tax Board/e-Customs is possible from 15 February. Form E is not pre-completed.
- Income tax return on business income (form E) must also be submitted by the persons who were not entered in the commercial register but who were engaged in business and have derived business income during a year.
- Business expenses and business income are taken into account in the year when the income was received or the expenses were made.
For example: A sole proprietor has delivered goods to a purchaser and in October the sole proprietor submitted an invoice in the amount of 500 euros. The sole proprietor received money for delivered goods next year in January. The amount of 500 euros is deemed to be the sole proprietor’s income of the next year and it is not taken into account by declaration of income in the current year.
- If an enterprise is transferred to a person who continues the activities of a sole proprietor, the transferor shall submit an annex to Form E together with Form A and Form E by 31 March of the year following the period of taxation.
- Income tax return form E must be completed on the cash basis accounting, i.e. if a sole proprietor has had accrual basis accounting, he or she is required to adjust it to the cash accounting.
On form E income and expenses are entered inclusive of the value added tax.
Business income and expenses are taken into account in the year when the income was received or expenses were made (expenses paid).
Amounts entered on form E must be in compliance with the amounts entered in the accounting. When submitting the form E the annual accounting must be in organised and final form.
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Income of sole proprietors
- According to the Income Tax Act, income from a commercial or residential lease may be declared either on Form A or Form E. A person shall declare income from a commercial or residential lease on Form E, if the taxpayer is registered as a sole proprietor and income from the commercial or residential lease is his or her business income. If the business expenses are entered on Form E, income must be also declared on Form E.
If the income from a commercial lease is not business income and income tax on this was not withheld, Table 7.3 of Form A must be filled in.
If the income from a residential lease is not business income and the income tax on this income was not withheld, it shall be declared in Table 7.4 of Form A.
- Transfer of self-manufactured agricultural products
If the transfer of self-manufactured agricultural products (sale, exchange) is a line of business of a sole proprietor, he or she has to declare the income received on line 1.1, column 4 of the form E. If a sole proprietor provides other services as well (e.g. clears the local roads from snow with his tractor), it cannot be declared as the transfer of self-manufactured agricultural products, but as the provision of services (line 1.1, column 3 of the form E).
- Transfer of timber
If a sole proprietor has transferred timber (felled trees and stems, parts of stems after cross-cutting the stems logging waste) from his or her immovable, he or she has to declare the received income on line 1.1, column 5 of the form E
Upon transfer of timber also theimmovable register number of that plot of land, wherefrom the timber was transferred must be declared.
- Income from transfer of securities is not taxed as business income but as gains from transfer of securities. Such income must be declared on the form A, either in table 6.1 or in table 8.2.
- Financial benefits and scholarships or grants received in connection with business (incl. the scholarships and grants received from the state budget and the benefits received on the basis of legislation) must be declared as business income. Expenses incurred in connection with business may be deducted from the business income, benefits, scholarships and grants.
- Income from business abroad
When receiving business income abroad the table 1 of the form E must be completed. Registration must be broken down by countries and by types of income.
In the same table also the expenses made for receiving business income from abroad must be entered, and in respective columns of line 3.2 of the basic table of the form E the net amount of income derived abroad should be entered.
Sole proprietors cannot enter the expenses made for receiving the business income abroad under the expenses in the basic table of the form E.
Expenses of sole proprietors
- A person is allowed to deduct from his or her business income the expenses incurred in relation to business, only if this person is entered in the commercial register as a sole proprietor. Also notaries and bailiffs have the right to deduct their expenses.
- All certified expenses incurred in relation to business are deducted from the business income, when the connection of expenses with business is clearly justified. If the expenses incurred are only partly related to business, only the proportion of expenses related to business may be deducted from the business income. Expenses are related to business if they have been made for deriving business income subject to taxation or the expenses are necessary or appropriate for maintaining or developing such business.
Additional deductions on income received from transfer of agricultural products or timber
After the allowed deductions, a sole proprietor may additionally deduct up to 2877 euros a year from his or her income received from the transfer of unprocessed self-produced agricultural products (4 column 4 of the form E). Besides, the owners of wooded real estates who are entered in the commercial register as sole proprietors, may additionally deduct up to 2877 euros from the income derived from the sale of timber (4 column 5 of the form E).
Increased basic exemption may be taken into account within the range of a particular type of income. If a person is engaged in different lines of business, e.g. sale of timber and of agricultural products, he or she should have separate calculations of income and expenses concerning the sale of timber and separate calculations on the sale of agricultural products.
If the net income received for the sale of timber is smaller (e.g. 1500 euros) than the maximum amount of the additional deduction (2877 euros), then the part of income not deducted (1377 euros) cannot be taken into account in reduction in the yield of the agricultural income.
Source: Emta.ee (official)