The legal system has many scopes for business owners to save on taxes. One of the most feasible ways to reduce taxes is selling some of the stocks of the company. It has been recorded in the past that many individuals withholding stakes in major companies have saved up on their tax bills by selling off the stocks of the company. The difference between the market value of the stock and the price at which the stock has been sold plays a vital role in the deduction of taxes for the individual.
Freezing the assets
Another way, a person may save on taxes is by freezing the value of the current assets and transferring it to another trusted individual of the future generation. When the value of the assets increases, they may be sold at a higher price without paying the inheritance taxes which one would have had to pay in any other case. However, it must be kept in mind that transferring assets to another individual is not a cakewalk and there are few ways by which one may do so, abiding by the laws of the country. The first method is annual gifting. The legal system allows all individuals to transfer stocks of their company of value up to $15000 for bachelors and $30000 for married couples, to each child, on an annual basis.
Grantor retained annuity trusts is a strategy that helps in deducing taxes. As per studies, business owners in the U.S.A have saved nearly 100 billion dollars on taxes since 2000. This equals almost one-third of the U.S.’s real estate taxes. This procedure requires one to transfer certain shares of the company to trust. The trust pays an annuity that equals the value of the shares transferred. During this period, any appreciation in the assets of the company passes to the trust, and the owner is freed from paying estate taxes. However, for this strategy to work successfully for business owners, earnings and appreciation of assets of the company must always be more than the total annuity paid to the company by the trust. This strategy was first devised and then popularized by an attorney by the name of Richard Covey.
Rollovers and Exclusions
The third most efficient technique to deduce taxes is rollovers and exclusions. These are parts of the tax code, which allows concession on taxes if the company meets certain criteria. Section 1042 of the tax code states that an individual may sell company stocks to the employee of the company itself under a special plan called Employee Stock Ownership Plan (ESOP). Thus, the owner needn’t pay federal and sometimes not even state tax on the sales by rolling over the proceeds to stocks or bonds of other companies, which operate on a domestic scale. Section 1045 of the tax code allows the business owners to roll over the gains received by selling stocks, which may be taxable, into another stock or share within sixty days of the sale. The legal system doesn’t recognize the capital gain in this case and thus taxes can be deduced.
Investing in foreign sales is a fruitful way of reducing taxes via Interest Charge Domestic International Sales Corporation. This body was launched to allow exporters to convert their income to qualified dividend income. Hence the business owners can easily convert their income tax to capital gains tax. This will result in a huge reduction in federal taxes each year. This also increases the value of the business, which is an additional benefit.
Collecting Tax Credits
Another very efficient method of saving up on taxes is by collecting tax credits. The government issues tax credits to individuals and businesses if they meet certain criteria. This is mainly done to encourage people to take actions that will result in benefiting the earth or people. For example, tax credits are offered when an individual or business goes green and caters to the environment or when they provide health coverage for the workers. Tax credits are also offered when the company or individual caters to the needs of specially-abled employees.
The individual may also invest in equipment and vehicles for the company, to get a concession on taxes. Section 179 of the tax code enables an individual to subtract the cost of certain assets as soon as the assets are put to use. Thus, the tax one requires to pay is much less. The U.S.A allows up to one million dollars of deduction. In 2018, the tax concession was increased from 50% to 100% for all equipment and asset in use from September 2017 till January 2023.
Gifting also reduces the tax bill. The tax code allows a deduction of up to $25 per person on the cost of gifts given to individuals including customers, vendors, and goods dealers. Thus, the tax bill is also reduced.
The individual may also invest in stocking up supplies for the business. In this manner, the expenses will increase, and the income will decrease relatively. Thus, the tax calculated will be much less than the actual amount without the company incurring any losses.
One of the most important ways to deduce tax is to write off the debts. These amounts will be deducted from the income of the business and thus taxes will be calculated on a much lower income amount, thus saving the owner save on the taxes each year. These bad debts include money loaned out to vendors, dealers, and other smaller businesses that have failed to pay back.
One must analyse the nature of the business and choose a strategy that best suits them after carefully going through all the methods and measuring and comparing the benefits and drawbacks of each method. Thoughtful planning is extremely essential to save up on taxes. In these cases, one may seek the help of a professional. A tax attorney is an ideal person to seek advice from in this case. The individual may also seek consultation from their accountant or auditor. After proper thought is given to the subject must one device one or more of these strategies to enjoy a concession on the taxes.