So you want to pay less income tax from your business? Tax evasion is illegal, thus, I never recommend it to anyone. But tax avoidance is not. And if you will do it with good faith or with an intention to help people, tax avoidance can be a great way to minimize your business’ income tax expense. By becoming kinder and more generous to your employees, customers and other business stakeholders, you can actually reduce your income tax. So without further ado, here are 10 ways to do it.
1. Increase your employees’ salaries and allowances. This will increase your “salaries and wages expense” (allowable deductions), thereby decreasing your taxable income. If you have lower taxable income, you will also have lower income tax. But to claim your employees’ salaries and allowances as allowable deductions to your taxable income, make sure they are filed and reflected in your monthly withholding tax returns and annual withholding tax report.
By becoming more generous to your employees, you will also make them happier and more motivated to work, which can lead them to be more productive and make your business more successful.
2. Unload your employees’ work and hire more workers. Even if you’ll increase your employees’ salaries if you will also increase their workload, that would not be a kind act. So if you think your workers are already exhausted and bombarded with a lot of work, consider hiring more workers to share the workload. This way, your people and your business will be more effective and efficient.
With the right number of people in your company, you can already produce more output for your clients or customers. And with an increased number of employees, this also means your salaries expense will increase, your taxable income will decrease, and your income tax can be reduced just like in #1.
3. Provide your employees with training and career development. This will generally increase your “training and seminar expense”, which can also be claimed as allowable deductions against your taxable income. Again, lesser taxable income results to lesser income tax.
Don’t forget to ask for official receipts or invoices from your training or seminar providers so that you can properly record such expenses and claim them in your tax declarations.
Sending your employees to seminars and training to learn more is an expense. However, it will enhance their knowledge and skills, making them more competitive and productive.
4. Delegate other tasks to professionals. Leave other jobs in your business to the experts. Don’t make your regular employees sweep the floor or turn them into security guards and messengers. Don’t force them to do accounting if they are not hired for that. Rather, hire professionals or skilled people to do those jobs.
Consider getting the services of a janitorial agency, a security agency, accounting firm, and other outsourcing companies to do the jobs that require special skills. It will unload unnecessary tasks from your employees and will make them more focused to their core jobs.
By hiring professionals, your “professional fees” will increase, your taxable income will decrease, and again, your income tax payable will be reduced. Just make sure you are withholding taxes from your income payments to professionals or outside service providers to deduct them legally against your taxable gross income.
5. Improve your working place or business establishment. Make your office a comfortable place to work for your employees or your store a convenient place for your customers. Invest in building improvements, furniture, equipment, vehicle, office supplies or in the repair and maintenance of your other assets. These can increase your depreciation expense, supplies expense, repairs and maintenance expense and other related expenses that you can deduct to your taxable income to reduce your income tax.
Don’t forget to keep your official receipts or invoices related to your purchases to properly record, book and claim your allowable deductions.
6. Infuse more capital to your business. Yes, be generous to your own business. Put more capital on it. You can get debt capital by obtaining a loan. Loans will let you incur interest expense that you can also claim as deduction to your taxable income (should be adjusted if you have interest income subjected to final tax). See Sec. 34(B) of NIRC/RR No. 13-00.
7. Give discounts to your customers. Be generous with your customers. Make them happy by giving them sales discounts. Sales discounts reduce your net sales and taxable income, as well as your income tax. However, sales discounts may also lead to higher sales, especially if more customers will buy your products because of discounts. But in either case, your generosity will not be put in vain. 🙂
8. Give your customers or prospective customers some recreation and entertainment. Representation expenses refer to expenses incurred in connection with the conduct of business in entertaining, providing recreation or meeting with a guest at a dining place, amusement place and similar events/ places. Representation, recreation and entertainment expenses that are directly related to the conduct of your business can be allowed as deductions to your taxable income subject to a ceiling prescribed in the current tax law or revenue regulation (Sec. 34(A)(1)(iv) NIRC/RR No. 10-02).
9. Insure your business. Insurance premiums can also be allowed as deductions from your gross taxable income. These include life insurance and non-life insurance (car insurance, fire insurance and other property insurance. Thus, don’t deprive your business and people with insurance. However, take note that when worst things happen, business losses that are compensated by insurance cannot be claimed as deductions to gross income (Sec. 34(D), NIRC).
10. Donate to charitable institutions and other organizations. Donating will surely increase your generosity. Donations can be fully deductible or partially deductible. Donations to the government (NEDA priority projects), certain Foreign Institutions or International Organizations, and accredited Nongovernment Organizations are fully deductible to gross taxable income in accordance to Sec. 34(H) of NIRC and RR No. 13-98. Donations to institutions not stated by the code as fully deductible are only deductible to some extent depending on whether the taxpayer is individual (not exceeding 10% of taxable income) or a corporation (not exceeding 5% of taxable income).
By increasing your expenses that can be claimed as allowable deductions to your gross taxable income, your income tax expense can be reduced. These expenses will reduce your cash or increase your liabilities. However, they can also be transformed into assets or goodwill, as you will improve your employees’ productivity, your customers’ loyalty, and your business stability in the future. It might temporarily lower your business income, but in the long run, it can actually improve your business profitability. By that time, your income tax will increase but that increased expense will be easily absorbed by your profit growth rate.
Disclaimer: This article is for general information use only and doesn’t constitute professional advice. Moreover, new and subsequent laws and tax rules may render whole or part of this article obsolete. If you see any errors, please contact us to correct them.