Discover the Legal Methods to Reduce Your Tax Liability as a Business Owner
Taxes are a primary source of revenue for governments, which enable them to fund public services and infrastructure such as healthcare, education, defense, transportation, and social welfare programs. That’s the rationale why in most countries, citizens are obligated to pay taxes. Governments typically have laws and regulations in place to ensure that citizens will fulfill their tax obligations. In the Philippines, our tax code is based on the National Internal Revenue Code of 1997 as amended by Republic Act No. 10963 (TRAIN), RA 11256, RA 11346, RA 11467, and RA 11534 (CREATE). Failure to pay taxes or intentionally evading them can result in penalties, fines, or even legal consequences.
In business, every centavo counts, that’s why many business owners perceive taxes as a significant burden and expense. They argue that high tax rates and complex tax regulations can hinder business growth and profitability. With that in mind, here’s how business owners can legally reduce their taxes.
1. CHOOSE INCOME TAX RATES WISELY
For individuals, earning income from business and/or practice of profession, their income tax rates shall be based on either a graduated tax rate or an 8% flat rate. Generally, those with minimal expenses often favor the 8% tax rate option. It is because there’s an automatic allowable deduction amounting to 250,000. On the other hand, businesses with significant operating expenses and cost of sales/services choosing the 8% tax rate option may not be ideal as it could result in a higher tax liability to the Bureau of Internal Revenue (BIR). If you wish to avail of the 8% flat rate, here are the criteria:
Your gross sales/receipts and non-taxable income should not exceed the VAT threshold of three million pesos.
You need to be a self-employed taxpayer, either a single proprietor, a mixed-income earner, or a professional.
You need to be registered and subject to percentage tax or be a non-VAT filer.
You need to express your intention of availing of the 8% income tax rate option.
Note: The income tax rate option, once elected, shall be irrevocable, and no amendment of the option shall be made for the taxable year it has been made.
2. CHOOSE METHOD OF DEDUCTION WISELY
Tracking all the operating and overhead expenses of the business is significant to the business's growth and profitability. There are two ways of claiming tax deduction: Optional Standard Deduction (OSD) is a 40% tax deduction to your annual gross income, meanwhile, Itemized Deduction will allow you to claim a higher amount of expenses as long as it can be supported with source documents and within the allowed deductions set by BIR. Here’s the guide to assist you in choosing the best method of deduction based on the nature of your business.
Choose ITEMIZED DEDUCTION, if the ESTIMATED EXPENSES will be greater than 40% of the ESTIMATED INCOME for the taxable year
Choose OPTIONAL STANDARD DEDUCTION, if the ESTIMATED EXPENSES will be less than or equal to the ESTIMATED INCOME for the taxable year
3. DONATE TO CHARITY
Charitable and other contributions or donations may also be claimed as deductible expenses in full or subject to limitations. As a general rule according to Section 34(H) of the National Internal Revenue Code (NIRC), any donation or gift that is actually paid or made to a registered Non-stock, Non-profit Corporation, or Non-Government Organization (NGO) can be deducted from the donor's business income. However, this deduction is limited to 10% of the donor's taxable income for individuals or 5% for corporations, without the ability to deduct the total amount of the donation or gift.
However, there are exceptions to this general rule. The full amount of the donation or gift can be deducted without any limitation if it is paid or made to the following:
Government
Certain Foreign Institutions or International Organizations
Accredited Non-Government Organizations (NGOs) - Non-stock or Non-Profit Domestic Corporation
4. MAINTAIN DILIGENT BOOKKEEPING
Business owners must take accounting seriously. In case, you feel that your knowledge in bookkeeping is not enough and sufficient, consider employing an individual or an accounting firm whom you trust and who possesses the necessary expertise to handle the task proficiently. Doing so allows you to maximize your tax deductions and accurately report your taxes to the BIR.
5. ENSURE MEETING DEADLINES
Learn more about new government reforms and responses, so that you can keep up to date with the latest developments. Also, don’t forget to take note of the important dates and deadlines set by the BIR becausefailure to make/file/submit any return or supply correct information at the times required by law or regulations has consequences. For late filing of tax returns with tax due to be paid, the following penalties will be imposed upon filing, in addition to the tax due:
SURCHARGE - there shall be imposed, in addition to the tax required to be paid, a penalty equivalent to twenty-five percent (25%) of the amount due on a case-to-case basis
INTEREST - there shall be assessed and collected on any unpaid amount of tax, interest at the rate of twenty percent (20%) per annum, or such higher rate as may be prescribed by rules and regulations, from the date prescribed for payment until the amount is fully paid
COMPROMISE - where there is reasonable doubt as to the validity of the claim against the taxpayer. Additionally, the amount depends on the nature of the violation
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Disclaimer: This article or blog is only for general knowledge and guidance and is not a substitute for an expert opinion. For technical advice, please consult your tax / legal advisor for your specific business concerns. For comments, suggestions, and feedback, feel free to email us at jac@upcloudaccounting.com
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