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Tax Reduction for Small Businesses

Methods of Tax Reduction for Small Businesses

Paying taxes is an essential part and a liability of a business, thus taking care of it is very important. For small businesses it can proved to be a nightmare if the due care is not taken care of in advance, as capital is the main aspect for these businesses to grow. Thus tax planning becomes necessary in order to reduce the tax liabilities through various methods.

For this there are two major points to be taken care of which are as stated.

  • Understanding and awareness about the taxes to be paid: As a small business owner, you must have the basic understanding and awareness of the taxes that are applicable in your business and industry so that you can take the financial decision accordingly, and can plan your business strategy effectively.
  • Update about taxation rules and policies: The owner should also know and keep himself updated about the constant changes in taxation rules and policies that have any impact to his business. This can be easily done by keeping an eye on official Government portals or various industry websites.

How to save taxes?

A small business can also save up or can reduce the tax obligations by taking few steps and adopting various taxation methods as stated below.

  • Adopt an accountable plan: A small business must prepare an accountable plan in advance to showcase its assets and liabilities in the balance sheet in order to eliminate any of the Government disputes in future and to save on the taxes at the same time.
  • Deferred income or accelerate deduction in a business: To reduce the tax liabilities, this method is quite useful in which you can show your deferred income in the financial statement of next year instead of the current year, or else you can also show maximum deduction in your current year’s statement related to various expenses incurred for business. This will lower the amount of taxable revenue and will reduce the tax liabilities as well.
  • Structure the business well: How the business is structured impacts the tax liabilities, thus this is very crucial part. As a business owner you can decide on how you want your small business to be like. For i.e. paying a certain percent of revenue to charity can end up reducing tax liabilities. So plan your business structure well and in advance.
  • Importance of retirement plan: Retirement plan is an important instrument where you can park a certain amount of your revenue from small business over there. Government approves few retirement instruments where a certain limit for investment is given, which ends up in reducing the tax liabilities for the business.
  • Add employee benefits rather than raising the wages: When you increase salaries of your employees, you have to pay various taxes on that. Along with you, the employees also have to pay additional taxes after hike in salary. So the best way is to contribute to your employees’ benefits like health benefits. That will eventually reduce your tax liabilities along with that of your employee’s.

So let’s identify. as to what are the methods of tax reduction for small businesses:

Higher limit of capitalization: Setting a high limit with regard to the level of cash being spent on assets which would be perceived as a fixed asset. Hence, a bigger level of expense is considered as expenditure in the present time-frame.

Accelerated buying of assets: There might be cases wherein it would make sense in acquiring assets sooner than is essential. For instance, in case a fixed resource does not have an effective proficiency level or would be breaking down quickly, think about supplanting it with the best and latest assets. Doing as such would be increasing the costs of depreciation. However, it would likewise offer companies with a better and improved upper hand.

Writing off inventory: Make a review of the inventory only before the year ends. Also, remove all the things which are out of date. The expense of the items which are eliminated would be added to the expenses of the goods being put to sale and hence, would be reducing the income which is taxable.

Writing off Receivables: Make a review of the trade receivables as well as all of the other kinds of receivables before the end of the year. Also, whatever cannot be collectible need to be written off. This would help in reducing the income which is taxable.

Added Debts: In case there is a choice to be made amongst whether to make an added equity investment in business or attaining debt for meeting the fund requirements, you need to be using debt. When one would be doing so, the interest cost which is related could decrease the income which is taxable.

By structuring the tax planning in advance a small business can gain numerous benefits and can save as well. To know more about various Methods of Tax Reduction for Small Businesses contact Meru Accounting today!

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