10 ways to minimize business tax liability
How to minimize your business tax liability?
Taxes are probably one of the most daunting aspects of running a business. The idea of an audit can cause a lot of anxiety to business owners, particularly those who are just starting out or on the verge of scaling. But business tax liability doesn’t have to be a scary thing. In fact, finding ways to reduce tax liability can help your finance and accounting teams breathe easily. You just need to know how to lower small business taxes.
The key to understanding how to do this is to understand how corporation tax liability works, and work with your compliance team on ways to reduce how much you are due. In order to do that, it is important to know what different types of taxes are, and how you can minimize them. That is where business tax-saving tips come in handy.
What is tax liability?
The word “liability” alone seems nerve-wracking. However, the tax liability is nothing but the tax that you owe - either as an individual or as a business - to the government. This can be an amount owed to the local government, state, or on a federal scale. Like other taxes, they are used for social welfare purposes.
In the case of business taxes, they are used for the benefit of employers and employees - such as retirement funds, disability benefits, and insurance. Your corporation tax liability is short-term. It is not the tax amount that you have collected over the lifetime of your business. Corporation tax liabilities are calculated on an annual basis and must be paid within that time period.
Different types of business tax liabilities
Sales tax liability
Sales taxes are one of the most common forms of business tax liability. Businesses that sell taxable goods and services (defined by the government), have to pay a certain percentage of the goods or services value as a tax. This tax is not paid by the business themselves - it is added to the value of the goods and services for customers to pay. However, it is the duty of the business to remit this tax to the government.
Payroll tax liability
Payroll tax is also known as employment tax. It is deducted from employees’ salaries to cover their income tax liabilities, as well as any kind of government aid (such as retirement funds). It is the business that must calculate this taxable amount, deduct it from the salary, and remit it to the government.
Income tax liability
The income tax you pay depends on the type of business you own. This tax is calculated on the business’ income and comes from the business account. It is, like all taxes, calculated on an annual basis (i.e, your annual profit is taxed). For some business types, such as LLCs, partnerships, and sole proprietors, the business owner pays the tax from the income earned.
Property tax liability
Businesses that have real or personal property are liable to pay property taxes. In some cases, even intangible property is subject to this tax. The amount of tax you pay is determined by the value of the property, the tax rates in that region/industry, and whatever jurisdiction it comes under. Your specific case will determine the tax deductions you can make here.
Capital gain liability
Many businesses invest in other businesses. This could be in the form of equity, or acquisition. Alternatively, some businesses might sell stock or any other type of asset for profit (or for funding). Any capital gains on these assets are taxable. This profit is the difference between the price you acquired the asset for and the price you sold it at.
How are business tax liabilities calculated?
The first step to calculating your corporation tax liability is to know what type of entity your business is. There are different tax slabs for different levels of income, registration, and business model. For instance, companies in Singapore are charged a flat rate of 17% - however, there are tax exemptions for certain qualifying startups. Once you know which bracket you fall in, you can then start looking into deductions.
To reduce tax liability, you should know what exemptions and deductions your business qualify for. Oftentimes, there are certain standard exemptions of a pre-determined amount. If your list of deductions is higher than this standard exemption, then it is better to itemize and calculate every single applicable deduction.
In addition to deductions, credit can also help to lower the tax burden. Tax credits work slightly differently from deductions. Tax deductions reduce the amount of taxable amount - tax credits are applicable on the tax liability and reduce how much you pay. They might be nonrefundable, partially refundable, or fully refundable, depending on your situation. They are awarded depending on your location, type of business, and income bracket.
Once you know your final taxable income, have applied deductions, then you can calculate your tax liability (this is a percentage of the income after deductions). The tax credit is reduced from the calculated liability. The balance amount is what your final tax liability comes to. Check out some great business tax reduction strategies below.
How to lower tax liabilities?
1. Claim every business expense
Claiming your business expenses is better for your business. Having a clear list of every little business-related thing you spend money on (whether it be a plane ticket for a client meeting, or a car to travel to work) can actually reduce the total income on which your tax is calculated.
Business expenses are not considered a part of the profit you generate, so having all of them accounted for (along with proofs, like invoices and receipts) is your first step to reducing your tax liability. If you are wondering how to account for all your transactions, then you can invest in tax software for business.
2. Pay tax authorities early
Paying taxes on time is not just about doing the legal thing. The earlier you pay your taxes, you might even qualify for refunds or interest. Not enough business tax reduction strategies discuss this. This is why it is important to always have your accounts in order so that you can avoid delaying your payments till the last possible minute.
If your taxes files are in order, you can go ahead and pay early. Make sure you are familiar with how early you are allowed to pay, your accounting cycle, and if your predictions for future taxable income are correct.
3. Create a retirement fund
Did you know retirement fund contributions are not part of your taxable income? Investing in a retirement fund for your employees can help you claim tax deductions, while also helping your employees with their own future and individual taxes.
Government-recognized pension schemes and retirement funds offer deductions for certain amounts of contributions. These contributions are deducted from the payroll and go into the employee’s unique retirement account. Sign up for your business for one!
4. Maximize deductions
The best way to maximize your tax deductions is to have a dedicated legal team that specializes in taxes and audits. Your compliance team will work closely with them to help you reduce your tax liability as much as possible. Office expenses, paperwork, travel, phone bills - everything can be considered a business expense that is removed from your taxable income.
In order to maximize these benefits, having a subject matter expert is ideal. They will not only know how to categorize and legitimize these claims but also help you find deductions you might not otherwise know about. They also offer great business tax-saving tips.
5. Research and development relief
R&D tax credits are very underrated. There is a misconception that research and development tax credits are only for industries where groundbreaking research is taking place. This is not strictly true.
If you are investing tangible capital or human capital in innovating a product, improving your product/service, or even identifying a process for the industry - all of these can qualify as research and development investments. These investments can then qualify you for the R&D tax credit, which can lower the tax burden.
6. Work on capital allowances
Capital and investment allowances are certain amounts of money that are not counted towards taxable income. These are allowances that are related to business operations, such as plant and machinery, or other equipment. Which company assets qualify for this capital allowance is dependent on your local authority.
But they help reduce tax liability, particularly if these costs are very high for your business. It’s good to check with your compliance team which of your assets can be incorporated into the allowance category, and have them written off.
7. Pay yourself a salary
Not many businesses consider this, but paying directors and executives is a great way to lower the tax burden. Salaries are considered a business expense - so paying yourself can be written off from the taxable income. The benefit of being in this position is that you can choose your salary.
However, it is wise to remember that your salary will become part of your individual income and be taxable for income tax. So, calculate in advance how much you should take home to avoid liability on the business and yourself.
8. Charitable contributions
Giving back to the community and planet is important - it is also very beneficial. CSR budgets (Corporate Social Responsibility) are one of the largest expenses that businesses use for tax write-offs.
If you’ve ever been to a department store and had the clerk ask you to round up your bill for charity, then that is one of the ways in which the business is minimizing its tax liability. Charitable donations can allow tax deductions of as high as 25%! They are also a good way for your company to show what they stand for, and to improve your employer branding.
9. Consider an employee share scheme
Employee share schemes are beneficial, not just for tax, but also for productivity. These share schemes allow employees to have a chance at gaining company equity. It can encourage them to work harder, and help retain highly skilled employees. As far as tax is concerned, employees acquiring shares can reduce them from their income tax.
Meanwhile, as an employer, you can reduce your corporation tax bill while offering these below-market-price shares when you offset them against profits. Just make sure that the share scheme is approved by your federal tax authority and recognized as a tax-deductible scheme, otherwise, it will not lower the tax burden.
10. Keep up to date on current tax laws
It cannot be stressed enough - the best way for you to reduce your corporation tax liability is to stay up to date on tax laws. Tax laws change every year, as does the national and state budget. What might be taxable one year might not be the next. In order to always be aware of your taxable income, and all the deductions you qualify for, you need to keep yourself updated on the ways in which tax laws are changing.
Is expense system secret to lowering your corporation tax?
When it really boils down to it, lowering your corporation tax is all about being organized. Having your payables in check, accounting for all your receipts and expenses, and then calculating your profits - all of these are core aspects of knowing your tax liability. So, naturally, having tax software for business can go a long way to help calculate your taxes, pay them on time, and even reduce them!
Expense management systems, like Volopay, help keep track of all your transactions. Everything has a receipt, all data is captured in real-time. Your finance department never deals with any surprises, and your accounting department receives these updates as they happen. If anything, it can help lower small business taxes. All expenses are logged for easier analysis. Moreover, the predictive and reporting tools help you predict future tax liabilities so you can calculate future deductions, or even pay your taxes early.
Volopay’s reimbursement and corporate card features help keep your business expenses in place. They can be managed easily, and help avoid the hassle of chasing employees during tax season. The investment in an expense management system is a business expense in itself, in fact! Instead of worrying about finding a system that works seamlessly for your audits, automating your expense management can greatly reduce tax liability.
FAQs
Yes, your business tax liability is the tax you are due to pay. Your tax liability could be as an individual or as a corporation. When someone discusses how to reduce your tax liability, it is simply a discussion of methods on reducing how much tax you are due to pay. This could be deductions and taking advantage of certain special allowances for your category.
You need to recognize what type of entity your business is, in order to know if you have a tax liability. Once you know, have a look at what the tax laws are for that specific bracket. If your business income falls in a category that is lower than the minimum taxable income, then you have no tax liability. Make sure to take into account deductions, since deductions can help reduce tax liability.
Yes. Any entity, individual, or corporation, will face penalties for not meeting their business tax liability. This can be misleading statements during the filing, not filing and paying on time, or even avoiding disclosure of assets/income. Penalties are decided depending on the gravity of the failure. To avoid a penalty, it is best to declare and pay your taxes in a timely and accurate manner. If you are unsure about doing this, then it might be better to have an expert consultant on board.
The corporation tax deadline is different for different federal and state governments. In order to know when your taxes are due, you will need to check the deadlines for your business’ jurisdiction (on a local and a national level). Sometimes the deadline is not premeditated and depends on your company’s income cycle. Some corporate tax deadlines are listed below:
Singapore: 15th day of the 7th month of the income year (dependant on your annual income cycle)
India: March 15 (end of the fiscal year)
Australia: November 30 (towards the end of the calendar year)
Tax liability is the total amount of tax that you are required to pay to the government. A tax deduction is a reduction on the taxable amount, which helps reduce the overall amount of tax that you have to pay. A tax deduction is used to determine how much your total corporation tax liability will be.