Quarterly VAT Settlement for a Sole Proprietor with Mixed Purchases
Ms. Seo runs a small furniture shop in Busan as a sole proprietor. She is a general VAT taxpayer and files quarterly; the relevant period is the first quarter of 2025. Her records show: (i) taxable sales of 44,000,000 KRW including VAT, all to final consumers; (ii) purchases of inventory of 22,000,000 KRW including VAT, supported by valid electronic tax invoices issued to the shop's registration number; (iii) business promotion (entertainment) expenses of 1,100,000 KRW including VAT, supported by a valid tax invoice; (iv) a passenger car bought for 33,000,000 KRW including VAT, registered in the shop's name but used about 30% of the time by her family; and (v) 5,500,000 KRW paid to a simplified-taxpayer supplier who issued only a receipt, not a tax invoice. She has no other transactions and no carried-forward input tax. She asks you to book the transactions and tell her the VAT payable.
1. Compute the output VAT, the creditable input VAT and the VAT payable for the first quarter of 2025, stating the filing deadline.
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Output VAT is extracted from VAT-inclusive sales: 44,000,000 x 10/110 = 4,000,000 KRW.
Creditable input VAT is only the inventory purchase: 22,000,000 x 10/110 = 2,000,000 KRW. The entertainment expense is expressly excluded from input credit even though a valid tax invoice exists. The passenger car is a passenger vehicle, so its input VAT of 3,000,000 KRW is not creditable at all, and partial business use does not rescue a proportion of it. The simplified-taxpayer receipt gives no input credit because there is no tax invoice.
VAT payable: 4,000,000 - 2,000,000 = 2,000,000 KRW, reported and paid by 25 April 2025 for the first quarter. If the period had produced a refund, the timing of refunds for a general taxpayer would follow the same quarterly cycle.
2. Show the journal entries for the quarter, including the treatment of the non-creditable input VAT.
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Sales Dr Cash 44,000,000 Cr Sales 40,000,000 Cr VAT payable (output) 4,000,000
Inventory purchase Dr Purchases 20,000,000 Dr Input VAT 2,000,000 Cr Cash 22,000,000
Entertainment Dr Entertainment expense 1,000,000 Dr Input VAT 100,000 Cr Cash 1,100,000
At the end of the period the non-creditable input VAT on entertainment is reclassified to the expense: Dr Entertainment expense 100,000 Cr Input VAT 100,000
After that entry the input VAT account shows only the 2,000,000 credit it is entitled to. The entertainment expense carried to the income statement is 1,100,000 KRW including the irrecoverable VAT, which is the correct economic cost and also the figure used for the income tax entertainment limit.
3. What are the income tax consequences of the car, the simplified-taxpayer purchase and the entertainment expense?
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Car. The 33,000,000 KRW including non-creditable VAT is capitalised as the cost of the vehicle, and depreciation is claimed over the statutory useful life. Depreciation attributable to the owner's private use is not a necessary business expense and must be excluded; with roughly 30% private use, only the business proportion should be deducted. The shop should keep a mileage log to support the split.
Simplified-taxpayer purchase. The 5,500,000 KRW is a deductible purchase even without a tax invoice, provided the payment is evidenced by the receipt and bank record. What is lost is the 500,000 KRW of input VAT credit, not the expense deduction.
Entertainment. The 1,100,000 KRW is deductible only within the statutory limit for the business. The excess is added back in the income tax return. Because the irrecoverable VAT has been folded into the expense, the full 1,100,000 KRW enters the limit calculation rather than 1,000,000 KRW, which is often missed when the VAT reclassification entry is not made.