Running a business is a difficult task. For business owners like you, every cent counts. There are some business owners who are smart. They study the liabilities their business has and try their best to minimize them. If you’re running a business, you should never allow your business expenses to drain your finances. You must improve in managing your finances better with proper bookkeeping and accounting.
Moreover, one of the things that can help you mitigate expenses is conducting careful tax planning. Tax planning is when you try to minimize or reduce your tax liability to preserve more of your hard-earned income. You are simply trying to reduce the amount of taxes you need to pay to the government, through legal measures tax avoidance measures. This is entirely different from tax evasion, which is illegal and punishable by law. Tax evasion can land you in jail while tax avoidance equates to lowered tax dues. Learn the difference between the two so you could maximize your earnings each year.
Evasion Versus Avoidance
Tax avoidance uses lawful tax-saving devices. You are only trying to reduce the amount of tax you need to pay by utilizing your tax benefits well, including maximizing tax allowable expenses and incentives.
Meanwhile, tax evasion is the polar opposite. It’ entails using unlawful schemes to reduce your tax liability. You are trying to reduce the amount of tax you need to pay by intentionally lying and omitting numbers during the filing of your tax returns.
As a law-abiding citizen, you must practice tax avoidance because tax evasion will subject you to criminal or civil liability. In the long run, the BIR will charge you with penalties and interest on the due that you incorrectly paid.
Take note though that when you’re making transactions to minimize your tax liabilities, it should have some other legit business purpose other than avoiding tax or tax avoidance because it can be concluded by the authorities as illegal. Without proper supporting documents with clear purpose and economic substance, the authorities can call your transactions as tax evasion.
How to Legally Reduce Your Taxes
If you want to legally reduce your taxes, here are some measures that you can do :
1. You should keep track and claim the allowable deductions
An allowable deduction is any expense that is necessary for a business to make income. By keeping track of your overhead and operating expenses with proper bookkeeping and accounting measures, you will be able legally to reduce your tax by claiming those as allowable deductions. Take note though that it has to meet the criteria. It needs to be related to your business with a reasonable amount and you must comply with withholding tax requirements and must be legally supported by documents.
If you need to travel to another city to meet a client, the travel expenses will be considered an allowable deduction. The table below consist of allowable deductions you can consider.
Advertising & Promotions
Contributions to Charity
Communication, Light, and Water
Fuel & Oil Insurance
Janitorial & Messenger Services
Office Supplies & Services
Research & Development
Salaries & Allowances
SSS, GSIS, Philhealth, HDMF
Taxes & Licenses
With withholding tax:
2. You should diligently bookkeep
It is crucial that you take the accounting in your business seriously. If you are not that familiar with bookkeeping yet, you should hire a competent, trustworthy, and knowledgeable to do it for you. If you do that, you can find a way to maximize the deductions in your tax and report the taxes properly and correctly.
3. You should give medical insurance to your employees
You can reduce your tax liability by putting your money into health insurance. Doing this will benefit you and your employees while also reducing the amount of tax you need to pay. The government will consider the amount you deposited to health insurance as an expense. You can report the payments in your books of accounts. However, keep in mind that P10,000 is the maximum non-taxable amount for health insurance.
4. You should donate to charity
Donating to charity is sort of similar to getting a retirement plan. You are putting your income somewhere else when you donate to charity. Donating to non-profits is considered a deductible. The government will consider your business to have low income and thus reduce the amount of tax you need to pay. You will be able to benefit from it and help others as well. However, you have to keep the proper supporting documents when you use charity donations for your tax write-off.
If you need assistance with the preparation of your tax documents, give our team a call. We can minimize your taxes with legal tax avoidance measures.