How To Avoid Paying for Unnecessary Taxes for SMEs

A progressive economy springs from a healthy business environment where business owners enjoy the benefit of a fair and just taxation system of the country. If the business sector is happy the way they are doing business, and the government is also able to perform its functions in delivering public service through the effective taxation system, everyone enjoys a progressive country that meets everyone’s needs.

New investments increase in number to sustain the growth of the country’s economy; streamlined business transactions reduce the cost of doing business hence it fosters investor-friendly environment. If we were to run our business, we are to find out how we could make the most of our capital in a business and see how we could gain profits from it. We are to find out how long we could get a return on investment and make the most of the taxes we pay to the government. As much as possible, we try to see how else we could reduce our taxes legally through acceptable and legal means so we gain profits better to grow our business.

How to avoid taxes legally

Capitalize on Depreciation

As business owners, we can reduce payment of taxes legally by determining our gross income. We deduct that with the allowable deductions then multiply it by the tax rate. By increasing deductions, we are reducing our tax liability hence depreciation comes in. Depreciation expense is higher in earlier life of an asset, so in this case, our deductions from gross income is higher at the early life of an asset, which therefore results to lower or lesser tax liability.

Donate to charity

The increase in donations means a decrease in tax liability due to lower net income. Hence, it is also wise to do to some worthwhile scientific, religious, charitable, your or sports organizations to lower our tax liability.

Record legitimate business expenses

Business expenses are considered tax deductible once they are ordinary and necessary; ordinary when they are common and acceptable expenses in our business; they are necessary when they are helpful and appropriate for our business. Booking legitimate business expenses as tax deductions can reduce taxable income. This is made possible by ensuring that our financial records are in order and that we keep receipts of our expenses for reference. They are to be properly recorded for bookkeeping purposes. But since they are a challenge to record, use accounting software that will help you track revenue and expenses throughout a year. This also can help keep track of business tax deductions in the course of the business. Our business could also resort to research and developments. We can charge travel expenses to our business if combined with leisure travel and business missions for research and development purposes. We can collect all the receipts whenever we bring our customers and meet with partners and treat these as representation expenses. As a result, we can maximize this account to increase our expenses up to 0.5% of our net sales in our business, assuming our business is in trading of goods. However, if we are in service-oriented business, we can enjoy a higher ceiling of 1% of our net revenues. Assume that we are using our own home as our place of business, it is also possible to deduct a portion of our expenses, like mortgage interest, insurance, and utilities as business expenses.

The same goes for the use of our own car for business; expenses incurred for using the car for the business can also be included as car expenses, which is tax deductible. Examples of valid car expenses are gas, repairs, and insurance.

Other ways to lessen tax

  • The hiring of family members and relatives in the business can also be considered tax savings because their salaries may be deducted from the taxable income.
  • If our business keeps a lot of merchandise inventory, it is also wise to claim losses to obsolescence of goods as a tax deduction.
  • In case, we have customers who fail to pay their dues on time and have been delinquent for more than one year, we can such accounts receivable as bad debts. Hence, they care to be written off from our books and record and consider them as bad debt expenses.
  • If we are starting up our own small businesses, and our capitalization is not more than P3 million, we can apply as Barangay Micro Business Enterprise so we can avail of 100% income tax exemption.
  • Use independent contractors instead of employees. This is usually a wise approach to lessen the payment of taxes assuming that we are still starting up with the business and that we cannot afford yet to hire employees, as when we do hire, we will already be paying payroll taxes and provide other benefits.
  • Set up a retirement plan for employees assuming that we offer benefits for them. This retirement plan provides several benefits for our business and our employees; the employer contributions are tax-deductible; assets that grow in the plan are considered tax-free, and in a way, we are able to attract employees to stay longer to gain benefits from the retirement plan.
  • Use certain fringe benefit plans for your employees which taxes can be avoided, such as the following: health benefits, long-term care insurance, group life insurance, disability insurance, educational assistance, dependent care assistance, transportation benefits, meals provided for employee convenience.
  • Filing tax return on time is best to prevent incurring penalties. Failing to file the tax return on time and pay taxes to incur unnecessary expenses due to penalties incurred for late payment.

Conclusion

There are a number of ways on how to avoid taxes legally. Also, the government provides incentives for business owners to do their business through tax exemptions. These exemptions are designed to encourage them to start up a business that will improve our economy and provide employment for people. These tax exemptions help business owners grow their business but not to compromise their obligation to pay their tax, which is the lifeblood of the government. For without taxes, the government could not function well; it cannot deliver the basic government services and the much-needed infrastructure projects like schools, roads, and bridges, which are necessary to bring about progressive economy for the Philippines and for our people.

Oojeema simplifies tax computation and BIR form generation.