Taxes are the lifeblood of every governing body that has ever existed since time immemorial, and it’s safe to assume that it will be around far into the foreseeable future. Paying the correct amount of business taxes (no matter how high they may be) is a responsibility that every entrepreneur must shoulder if they wish their enterprise to prosper without the dreaded knock from the BIR.
But did you know that there are legitimate ways to lower your business tax bill that are well within the bounds of the law? And by “legitimate”, we mean that you won’t be labeled as a tax evader.
Legal Ways to Reduce Tax
There are two ways to reduce taxes: Tax Evasion and Tax Avoidance. While they both have the same objective, they are different in the sense that Tax Evasion is illegal while Tax Avoidance is legal.
What is Tax Evasion?
Tax Evasion when a taxpayer employs illegal ways or outside the lawful means to reduce taxes or avoid paying taxes at all. One element of tax evasion is that the taxpayer must have an accompanying state of mind that he is evading his taxes in bad faith or that he willfully, deliberately, and by no accident, evaded to pay his taxes.
What is Tax Avoidance?
Tax Avoidance is when a taxpayer tried to reduce his taxes within the means allowed by law. It is made in good faith and at arm’s length; otherwise, it won’t be regarded as such.
Read more about Tax Evasion vs Tax Avoidance in Atty. James Biron’s blog post: Tax Evasions vs Tax Avoidance
How Can You Legally Reduce Business Taxes? How Is Tax Avoidance Done?
Now that you know that it is possible to reduce your business tax without being charged with tax evasion cases by BIR, here are a few ways of tax avoidance or ways to avoid paying excess taxes, the legal way:
1. Book Legitimate Business Expenses as Tax Deductions
Depending on the nature of your business, it’s possible to mix business and leisure while charging the latter as tax-deductible expenses. If your business requires research and development, you can include a business mission on your next vacation trip and then charge the travel expenses to your business. Restaurant bills can be charged as representation expenses, so make sure that you collect your receipts when meeting with prospects or business partners to claim that deduction.
2. Bad Debt Expenses Can Be Written off from Your Books
For business owners with delinquent customers who don’t pay on time or fail to pay for more than a year, these account receivables can be considered as bad debt. Examine the fine print on your credit policy to determine if such accounts qualify.
3. Hire Family Members and Relatives
Your business can save on taxes this way because their salaries may be deducted from the taxable income.
4. Take Note of the Expanded Withholding Tax Rule to Avoid Double Taxation
Because of this rule, some of your customers are obligated to pay your income taxes on your behalf, which requires them to withhold a portion of their payment to you. To claim these against your income tax payables, you need to collect the BIR Form 2307 from your clients and present this to the BIR when you file your taxes.
5. Losses Due to Inventory Theft Are Tax Deductible
If the nature of your business involves keeping an inventory of commodities or merchandise, robberies or losses from obsolescence merit a tax deduction.
6. Find out If You’re a Barangay Micro-Business
Businesses with total assets of less than Php3 Million qualify as a Barangay Micro Business enterprise, where you may avail of benefits like a 100% income tax exemption, or even exemption from minimum wages or lower taxes if you live in certain locales.
7. Donations Are Tax Deductible
The tax-deductible percentages will vary, based on certain guidelines: the full amount of your donations to accredited non-government organizations are tax-deductible, while tax deductibility of donations to non-accredited NGO’s will be limited to only 5% of the taxable income for corporations, and 10% for sole proprietorships.
As long as you keep a detailed account of your books, safeguard all of your receipts, always identify your expenses properly and know your tax code, you will find perfectly acceptable ways to keep your business tax expenses low and not be charged with tax evasion.