Organizations employ several tax reduction strategies to reduce taxable income by incurring acknowledging of expenses in the current financial year rather than overlooking them. By doing this, some of the taxable income is recognized later with associated income tax liability. The ways to increase incurring expenses are in the article below.
Capitalization limit
Setting a high limit for asset capitalization allows money spent on a fixed asset to increase. It will enable expenditure for a concerned financial year to be of more significant proportion. For example, if the organization has set a $6000 for purchasing computer systems for employees.
They make the purchase early but do not acquire the items. It allows them to record the expense in the current financial year to increase its incurred expenditure account.
Depreciation
To incur increasing depreciation expenses, the organization must employ an accelerated depreciation method. It allows the organization to report high expenditure of depreciation to evade tax.
However, an organization can still employ a normal depreciation for financial reports.
Acquiring assets
If the organization has maintenance or repair expenses with current assets, they must acquire assets before they are needed. It has two implications; first, it allows the company to become efficient. Secondly, it will enable them to incur increased expenses in depreciation. Depreciation records an expense account, which means low taxable income.
Inventory
Review inventory before the end of the financial year and remove all outdated items. It allows the organization to add those items to the cost of goods sold, ultimately increasing expenditure and reducing taxable income.
Receivables
If the organization has any collectible receivables, then it must write off all the receivables before year-end. It records the income it receives, but it is not cashed. It is being recorded but not realized, which ultimately allows them to reduce taxable income.
Debt
If the organization chooses to make equity investments or acquire debt to meet needed funds, it must use debt. Debt allows businesses to incur interest expenses which increases expenditure. The interest expenses incurred must be paid before the financial year ends.
Family expense
If an organization employs family members, then there is an option for a business to incur certain expenses on their behalf. For example, if the company decides to buy a car for a family member who uses it for business purposes. It allows a business to record the expense, which reduces taxable income.
Business Travel
Record all the trips taken for business. It allows enterprises to incur deductible travel expenses, allowing incurring the cost. Taking these trips may get a person flier points which a person can use for any personal trip.
Defer Income
When the financial year is closing, the business must minimize income and increase expense accounts to reduce tax applied on income. An organization will pay their tax eventually, but it allows them to save their money in the current year. Low tax slab recognition allows a small percentage of deductible tax.
Repairs and Maintenance
It must make any repair or maintenance payments before the financial year ends. It includes rents, employment, etc.
Donate and Repurchase
Donating to charities has tax benefits. An organization can increase its charity’s expense by donating in terms of securities owned. Charities do not pay tax on the sale of securities. These securities are purchased back from the charities at a higher price which it initially bought at a low cost. Still, tax capitalization is now being charged at the market price, which is higher than the initial. So, it allows an organization to reduce income tax derived from securities if they wish to sell them in the future.
Tax havens
Some countries have a very effective tax rate for foreign investors, allowing investors to financially secrecy and gain maximum benefits from these tax havens. These companies are known as offshore companies in one’s country. The biggest tax havens are the following countries: Cayman Islands, Hong Kong, Switzerland, United States, Singapore, Luxemburg, etc.
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