How to pay Zakat on business assets
Business assets are subject to Zakat and these include cash, finished goods, work in progress, raw materials and strong debts, i.e. money owed to the business that is likely to be received. Business assets must be valued at their current market price. For finished goods, this should be their retail sale price. For unfinished goods, this should be whatever price you expect the unfinished good to fetch on your Zakat anniversary date.
I have a question regarding old business stock. My friend and I set up a small business venture in 2007 selling jilbabs and hijabs. After a few months, our respective careers meant that we stopped trading. We have had remaining stock since 2007 that we have not sold or made any action to sell as the business is no longer functioning. I am not sure what the Zakat liability is on this stock as it has been sat in our homes since 2007 gathering dust. Please can you advise what the Zakat liability is on this old stock? We can easily calculate the value of the stock if Zakat is liable.
Due to deficient knowledge at the time of setting up the business, we did not know we owed Zakat on goods for sale.
You can value them as close to dead stock, i.e. ask yourself what you would have happily accepted as a price for someone to purchase all the items from you and use that as the value on which you apply the 2.5%. This would not be the case if your intention for any of the items changed to being for personal use. So anything you might have used for yourself, you would exclude of course.
I have two queries related to Zakat calculation.
- I have invested an amount of RO7500.000 in an existing hotel/restaurant business on a profit and loss sharing basis. I have been offered a 15 percent profit share in the total business. Is Zakat to be paid on this amount of RO7500.000 every year or on its profit only?
- I am buying a plot of land with an intention of building a house at this moment and may sell to buy another better land for the same purpose in future. I have paid 75% advance at the moment and in a few months when I go home, I will get it registered by paying the remaining 25% amount. My question- Is Zakat payable on 75% advance paid; or on 25% balance amount with me?
Are you actually a 15% shareholder? If so you will pay Zakat on the net profit that is left over on your Zakat anniversary from what you receive. You also need to calculate the Zakatable assets of the underlying hotel/restaurant business and then pay your share of the Zakat. e.g. if there is RO100,000.000 of cash in the business then you need to pay Zakat on 15% of that amount which is 2.5% of RO15,000.000
- If management is paying for the shareholders already then nothing to worry about apart from the net profit proceeds.
- If your intention with the land is simply to hold onto it for now then all you need to pay Zakat on is the cash you have with you, unless the payment of the 25% is contractually obligated upon you – in this case there is no Zakat to pay, i..e you can deduct the outstanding balance from your Zakatable assets before you calculate your Zakat liability.
If however, your predominant intention is to develop the plot of land and sell it on then, Zakat is due on the entire current market value of the land. You should make a calculation for this each year on your Zakat anniversary but you are permitted to make the actual payments for past years when you do finally sell the land.
I have a business account that has funds in it. I have not released this as dividends. Would I still pay Zakat on it or is it only when I release amounts as dividends?
Yes, Zakat should be paid on all cash sitting within a business as well as cash held personally.
What if my business liabilities exceed my business assets?
If you find that your business liabilities payable between now and your Zakat due date exceed your business assets then you may deduct business liabilities of the forthcoming lunar year from your Zakat calculation.
Is Zakat Nisab on Capital and Profit or on Profit alone?
This depends on the situation and one’s intention with capital investment. For example, investments made with the intention of resale are subject to Zakat on their capital value plus any net cash left over on one’s Zakat anniversary. But if an investment is bought to hold on to with no intention of resale, then no Zakat is due on the capital. Is there a particular situation you are concerned about? If so, please share the details and I can try to provide a more specific answer for you insha’Allah.