Whether a resident or non-resident company, any for-profit firm must pay corporate tax to the government. As is in any ideal state, the government uses taxes to build infrastructure, pay civil servants, fund projects, and improve the living standards of its citizens through better services in sectors like healthcare and education, among others. One avenue the government could source the funds is through taxing businesses.
Although it’s a statutory requirement to pay taxes on every profit generated, the law also provides some legal ways by which businesses can reduce how much they pay. So are you paying too much tax? If your answer is yes, this article is for you.
In this article, you’re going to learn some key strategies you could implement to help your business legally reduce the taxes you’ll need to pay. We also cover several ways to legally reduce business taxes.
Keep in mind, however, that taxes are considered a business expense. Therefore, when you reduce the tax burden, you increase the chances of maximizing your profits.
What is Corporate Tax?
Corporate tax is a levy imposed on the net profits of a company. A for-profit company is any organization registered under the companies act or similar legislation in your country. Examples of such companies include corporations and limited liability companies. Therefore, if your business falls under one of these categories, you’re liable to pay corporate tax, either to the federal or state government.
How Can Your Business Save On Taxes?
Remitting some money to the government is never fun. If given the choice, no business enterprise would choose to pay taxes. However, that’s not the case. It’s mandatory to share your profits with the government. The good news is that there are several ways of reducing business tax liabilities. Here are 5 ways to legally reduce business taxes.
1. Build A Retirement Program
Starting and building a retirement plan is one of the most effective strategies that can allow you to qualify for corporate tax deductions. To enjoy this tax-saving strategy, you can either fund a retirement plan for yourself or for your employees.
However, the retirement program you’ve decided to join must be a registered organization. This means that you don’t qualify for this type of tax deduction benefit if you fund an unregistered retirement plan. So make sure to research a registered retirement scheme and join the one that suits your business needs.
2. Hire Family Members
Another best way to help your business reduce corporate tax payable is to employ a family member. The tax act allows you to deduct some employer taxes you could be paying for another staff member by hiring a family member.
For that reason, your country’s tax authority gives you a variety of options to reduce the taxes you pay by employing a family member. For instance, you can hire your spouse to avoid paying unemployment taxes or employ your children to avoid paying employment taxes. Just make sure they’re qualified for the position, though. You don’t want to be accused of nepotism.
3. Write Off Bad Debts
There’s no doubt that most businesses operate on an accrual accounting basis. The accrual accounting concept allows businesses to recognize income when earned but not when received. This principle is applicable mainly when a business sells its products or services on credit.
Selling on credit allows customers to take goods and pay for them in the future. However, those customers might completely fail to pay for the goods, thus forcing businesses to write off customers’ accounts as bad debts.
So if some customers become unresponsive and fail to pay their debts, you can write off the amount they owe your business and then subtract these amounts from your total taxable income. Doing so allows you to pay a reduced corporate tax.
4. Support A Charitable Institution
Supporting a charitable organization by way of donations is another smart strategy to evade paying more taxes. A charitable institution is a community nonprofit organization whose aim is to support society’s most vulnerable. Some good examples of charitable organizations are orphanages and senior homes. Funding such institutions enables you to enjoy tax breaks by deducting the full amounts of money you donate from your total taxable income.
5. Change Your Business Structure
Last but not least, you can reduce the tax burden by changing the structure of your business. Remember that different tax rates apply to various business structures. So if you realize that your business structure is attracting a lot of tax, you can consider restructuring it to save on tax. For instance, you can save a lot of tax by switching from a limited liability firm to a corporate company.
5 Ways To Legally Reduce Business Taxes – Summary
Minimizing expenses is one of the best ways to maximize the profits of your business. Though there are several ways of minimizing costs, saving on tax is the most effective strategy. Saving on tax allows you to pay less tax to the government, thus enabling you to reduce your expenses and increase the bottom line.
As discussed in this post, there are several strategies that can allow you to legally reduce the taxes you’d have to pay. So if you want to save on tax and take your business to the next level, implement the strategies you learned here.