7 Ways American Businesses Reduce Their Taxes
Tax is often seen as a necessary burden for consumers and businesses alike. However, many businesses and major corporations navigate their tax, in such a way, that they can either reduce or diminish the amount of tax that they need to pay. In fact, according to CNBC, “at least 55 of the largest corporations in America paid no federal corporate income taxes on their 2020 profits.” This is largely due to large scale tax planning. However, there are many ways for any business, no matter the size, to reduce their taxes.
Ways Businesses Reduce Tax
1. Retirement Plans
Creating and contributing to retirement plans for employees, and business owners, can help businesses reduce their taxes. This is a strategy that can be adopted by any business, no matter the size or number of employees. However, it is vital that the chosen retirement plan is approved and on the list of plans that is ordained by the IRS. Often, businesses choose 401(k) plans, and this is deducted from taxable income. This often reduces federal tax. In addition to this, all growth is not subject to tax and can be withdrawn whenever.
2. Tax Credits
Tax credits are an interesting option for businesses, as they are a way for the government to incentivize certain practices. These practices vary, but businesses can qualify for tax credit by hiring a certain number of employees, or by reducing their carbon footprint. In addition to this, businesses can also provide accessible facilities for the public, or employees, which makes their company more equitable. This is another way to qualify for tax credits. It is important to note that businesses benefit in two ways from performing these practices. The first is the obvious tax benefit, and the second is that they may increase the business’s positive reputation. However, in order to benefit from tax credits, it is advisable for businesses to seek out financial assistance and advice.
3. Travel Expenses
Many businesses require travel in order to perform certain tasks. Some businesses require employees or shareholders to fly to different states for negotiations or business deals. In these cases, the employees would require airfare and accommodation, as well as remuneration for travel within the destination. This offers businesses the opportunity to write off travel expenses as a tax deduction. Business owners can even schedule a vacation whilst on the business trip, and deduct tax based on the amount of time spent working.
It is widely known that businesses can write off charitable donations and contributions as tax deductions. However, the chosen charity must fall within the designated list created by the IRS. In addition to this, it is an imperative that businesses itemize their deductions. Businesses can even donate physical items, and use the value of those items when deducting. It is important to note, however, that there are limitations on how much can be deducted in any given year for charitable donations. This, coupled with the necessity to itemize deductions, often makes donations a more difficult way to reduce tax. As a result, it is more common for large corporations to utilize this route.
5. Offshoring Profits
Many large businesses and corporations in the US choose to offshore their profits for tax purposes. This often allows businesses to pay less corporate tax within the US. In addition to this, little to no tax on profit is required in the chosen country. This has proliferated the existence of ‘tax havens’ like Singapore and the Cayman Islands. This route for reducing tax can be more tricky to implement, and requires significant financial advice and management. Many corporations that are leaders in their industry, like Apple and Coca-Cola, either utilize tax havens or offshore their profits.
6. Accelerated Depreciation
Accelerated depreciation is a popular and highly successful way of reducing tax. Accelerated depreciation is the process where a business deducts the cost of an asset within a period of time, and the rate of depreciation within the deduction is faster than the real depreciation of the asset. It is important to note that the period of time that this occurs within is the early years of an asset’ existence. This incentivizes investing in assets, as well as provides businesses with tax relief.
7. Choosing a Different State for Incorporation
Many businesses choose a separate state for business incorporation. This is largely due to the fact that some states offer better tax benefits. For example, Wyoming is often seen as one of, if not the best, states for tax. This makes it an appealing state to form an LLC. The state has no individual income tax, and it does not levy corporate income tax. In contrast to this, California is seen as one of the worst states for tax. It has both the second-highest individual income tax rate, and the second-highest corporate tax rate.
Consumers and businesses are bound by the obligation to pay taxes, however, many businesses and employees find ways to reduce their overall tax burden. By doing this, businesses are able to increase and retain more of their accrued profit. Some methods of reducing tax are easier than others. For example, choosing a specific state for incorporation can be quite simple, especially when it is done early. Other methods require more time, experience, and knowledge, such as offshoring profits. In the case of the more difficult tax reduction methods, it is always advisable for businesses to seek the counsel of accountants and financial advisors.