With the calendar year coming to a near close, now is the time to get your finances in order. Apart from doing your year-end accounting and bookkeeping, this includes your tax planning strategies. Tax planning involves the careful weighing and analysis of your different tax options to determine the most beneficial way to conduct your business.
Not only will proper tax planning help you save on taxes, but it will also reduce tax exposures during tax examinations and audits conducted by the BIR. To get the ball rolling on your tax planning, here is a compiled list of 8 strategies that you must apply for better outcomes. As the famous adage goes, failing to plan is planning to fail. So might as well get started on the right path to ensure success. Let’s dive in!
1. Efficiently utilize all available tax credits
Withholding tax certificates are evidence of income tax payments that have been paid for in advance. These payments are deductible from annual income taxes if you have proof for these transactions, as the claim for withholding tax credit must be supported by a withholding tax certificate that is creditable, issued by customers.
2. Maximize allowable deductions
Certain deductible expenses must be evidenced by documents like sales invoices or official receipts. Additionally, some deductible expenses require specific proof, like a board resolution for bad debts. Noteworthy, the right tax must be withheld if an expense is subject to withholding taxes, or else, this expense might not be allowed as a deductible. If you list it down without proper supporting documents, you may be fined and penalized by the BIR.
3. Know the recipient of your donations
Charitable donations made to accredited institutions are entirely deductible under certain conditions. In order to claim the deductible on your donations, you will need a Certificate of Donation containing the donee certification and a donor’s statement of values. The BIR has a list of acceptable charity institutions should you wish to deduct charitable donations.
4. Determine the method of deduction that is most advantageous for you, Itemized Deduction (ID) or Optional Standard Deduction (OSD)
Optional Standard Deduction (OSD) refers to a number of deductibles that do not exceed forty percent (40%) of your company’s gross income for the taxable year. Itemized Deduction (ID), on the other hand, allows for you to claim much higher proportions of expenses as long as you are capable of providing evidence to support it, and the expenses fall under the allowable deductions of the BIR. The OSD is usually the better method of deduction if your company has a low cost of sales as its high tax base would result in lower income tax due for payment.
5. Decide on the best option for addressing excess income tax payments
You may opt to carry-over excess credit on their tax payment may carry it over to the next taxable year or quarter or refund the excess amount of taxes paid or apply for a tax credit certificate. Note that choosing the carry-over option is irrevocable. Additionally, applications for refunds will expose you to an audit investigation, so make sure your accounting statements are to facilitate the process. Furthermore, you must also think of the cost of refund versus the time it will take to get the money.
6. Do not tax what is non-taxable
Make sure your accounts are treated properly. Keep receipts and invoices and monitor your transaction to avoid being taxed in excess. This is where consistent accounting and bookkeeping help. Staying organized ensures you don’t miss out on anything and avoid a BIR audit.
7. Avail of tax treaty relief for residents of tax treaty countries
Some transactions may be covered by a tax treaty. For these transactions, you are required to file a tax relief application. Check out the BIR official website to see which treaties apply to you. Notably, there are many treaties and incentives that apply to expats or foreign companies conducting business in the Philippines.
If you need help fine-tuning your tax strategy, input from a Certified Public Accountant will help. Remember, accountants are not made equal, and only those who passed the national licensure examinations can provide representation for the BIR. Should you need assistance, give our team of CPAs a call. We can help audit your books and ensure you remain tax compliant to avoid a tedious BIR investigation. Take advantage of our free 30-minute consultations.