In business, every centavo counts. When it’s about the bottom line, the smart businesses are the ones who study their liabilities and minimize them as much as possible. You shouldn’t let expenses drain your finances if there’s a way to manage them better.
This is where tax planning comes in. It means that you handle your finances to reduce your tax liability, or the total amount you need to pay the government. If you do your tax planning well, you’ll be on your way to tax avoidance. Which, by the way, is completely different from tax evasion.
Although they sound like they’re referring to the same thing, they’re not. The biggest difference between the two is that tax avoidance is completely legal.
In tax avoidance, you’re making use of your tax benefits to lower taxes for your small business. In tax evasion, you’re deliberately reducing your tax liability by lying or omitting numbers when you file your taxes.
That’s why you would want to do tax avoidance. That’s how you can ethically and legally reduce business tax in the Philippines. But what are the ways you can actually do that?
What even is an allowable deduction? It’s any necessary expense a business must make to create an income.
If you keep track of all your operating and overhead expenses, you can claim them as allowable deductions to reduce tax legally.
Of course, the allowable deduction must meet certain criteria: It must relate to your business, while still in the reasonable amount and complying with the withholding tax requirements, supported by documents and not contrary to law.
For example, if you needed to fly to another city to close a deal with a client, the travel expenses (transportation and accommodation especially) are considered allowable deductions.
Here’s a list of allowable deductions:
* Has withholding tax
Yes, there’s the retirement and medical benefits with SSS and PhilHealth. But another way to reduce your taxes is to put your money in health insurances.
This is an ideal benefit for you and your employees that can help your taxes. The government considers the amount deposited to medical insurance as a type of expense. You may report both your and your employees’ insurance payments in your books.
This exemption comes under some conditions. One of which is that the maximum non-taxable amount for health insurance is PHP 10,000.
In the eyes of the government, you’re making less money. While that’s true, you can think of it this way: you’re saving up from reduced taxes while also setting aside money for emergencies you and your team will benefit from. It’s a kind of savings any business needs.
In terms of taxation, donating to charity is similar to getting a retirement plan. You’re putting your income somewhere else — in this case, charity — and lowering your income. Charitable donations are considered to be a deductible, which means the government considers your income lowered. It doesn’t hurt that you get to help others either.
If you’re running a business, you probably already know this. But we still cannot stress this enough. You must take your accounting seriously.
If you think you’re still not familiar enough with bookkeeping, hire someone you trust but also knowledgeable enough to do the job well. That way, you can maximize your tax deductions and report your taxes correctly.
2020 has had a long list of changes that the whole world wasn’t expecting, with the COVID-19 pandemic at its forefront. During this time, it is all the more important that you as a business owner keep yourself updated with the current news, especially those related to your business. There may be new reforms — maybe even exemptions and refunds — that may be applicable for your business.
Under the TRAIN Law, the deadline for the first quarter payment of income tax of the current year has been moved from April 15 to May 15. But the rest of the deadlines remain the same, including the deadline of the previous year’s annual income tax return on April 15.
While rare, important dates and deadlines may be moved due to unforeseeable circumstances, as it was this year when the deadline was moved to June 15, 2020 in light of the nationwide community quarantine. Similarly, the deadline for VAT refund applications was also extended for the same reason. You may check this updated list of tax deadlines to keep up to date with the latest developments.
In response to the nationwide health crisis, the government has implemented new reforms to help the economy recover and taxpayers deal with their financial obligations. These reforms include but are not limited to the extension of the deadline for tax filing as well as some tax exemptions.
According to the Bayanihan II Act (Republic Act No. 11494) that took effect on September 14, 2020, exemptions from income tax are granted to the following select compensation:
Most of these exemptions from income tax are especially helpful for health-related companies. But there are a few more exemptions which others may also benefit from. If you’re importing critical equipment or essential goods (which includes food and the like) for your business, these may be exempted from import tax. If you currently have a loan with a bank and want to request a term extension or a restructuring, the additional documentary stamp tax (DST) is exempted.
Additionally, the government is currently studying a proposed bill known as the Corporate Recovery and Tax Incentives for Enterprises Act (CREATE) that aims to help micro, small, and medium businesses pay lower taxes. If passed, CREATE is supposed to ensure that more incentives are provided for small businesses in areas that are less developed or farther from the central urban areas. This is also to create more local jobs and encourage more productivity in small businesses across the country. However, as of November 1, 2020, the CREATE bill remains in the discussion pile of the Senate.
With the implementation of the TRAIN Law, some of the other legal ways to reduce your taxes, such as declaring dependents and personal exemptions, are off the table. But with the government’s responses to the effects of the global pandemic, there may be a few more ways that you can use to reduce your taxes legally. Still, in the end, each of us as citizens must pay our taxes to contribute to the country’s growth.
Want an easy-to-understand tax guide for your business? Download the Taxumo and Globe MyBusiness’ Tax Cheat Sheet now! You can also rely on Taxumo Lifeline, which helps update the BIR records of dormant businesses – those with no income, no expenses, and no Withheld Tax.
It also pays to be madiskarte during these trying times, not just with taxes. Download the free Diskarte Kit to help you map out the steps you need to take to help you manage your business better today.
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Aside from reducing your taxes, another way you can limit your expenses is using GCash for Business. With its rebates and reduced transaction fees, it can save you money while you use it to send salary, allowances, commissions to employees, or loan proceeds to your customers. Click here to learn more.
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