Finding outside sources of capital can be a challenge for private companies. That’s why saving tax is often the first line of defence for owners of private companies. Tax optimization can lead to an additional source of cash. The lower a private company’s overall tax rate, the more cash is left at the end of each year for the owner to reinvest in the company, or to consider as profit.
Private businesses must consider the positions of both the company and the owner when investigating strategies to lower their overall tax rates. This means utilizing techniques that work to lower both corporate and personal tax.
But there is good news for owners of private companies. “There are a number of tax rate reduction opportunities for private companies. Today’s sophisticated private business owners are looking for tax-saving approaches that go beyond the traditional methods, such as income splitting or bonus-out strategies. The techniques can be more complex, but they can help uncover unexpected sources of cash that companies can reinvest in operations.
Here are three strategies to help private companies save tax:
1. Take advantage of R&D tax credits
Tax Incentive Program that encourages businesses in all sectors to conduct R&D that will lead to new, improved or technologically advanced products or processes. Many companies are eligible for this type of credit, but they aren’t aware of it.
2. Implement effective compensation strategies :
Typically, when year-end arrives, a private company owner tallies profits and distributes an appropriate amount to himself and key staff by way of bonuses. Bonuses obviously attract income taxes. In some countries, a person can end up paying as much as 46 percent in personal tax. That’s where innovative compensation strategies come in.
Effective compensation strategies allow for both the deferral and the reduction in the tax rate on compensation. Employing such techniques not only results in a lower overall tax rate for the private business owner, but may also motivate staff by increasing the amount of their take-home-pay.
There are many ways to implement effective compensation strategies.
One way, for instance, is to apply a stock option-based model in the private company environment. Identifying the right strategy comes down to a specific company’s particulars, so it’s important to work with a tax specialist who is familiar with all the compensation options.
3. Consider worldwide tax planning
Some countries, have demonstrated a willingness to reduce corporate tax rates. “Private business owners can’t be oblivious to that because it can amount to a way to keep more cash for their businesses,” he says.
Companies can make use of this strategy by restructuring the way they finance their capital, through a financial intermediary company, and the way they hold their assets. It’s easy to get tangled in the web of tax regulations associated with international tax planning.
These sophisticated financial strategies require consultation with your tax advisor.
Effective tax optimization takes long-term planning
These three techniques for reducing tax rates are available to all private companies. Any of these strategies should be used in conjunction with strategies that allow for the deferral of taxes. Deferral strategies can take many forms, ranging from deferrals of when income is reported to accelerating deductions. In the end, deferred taxes still have to be paid, but deferrals that last a number of years can be just as valuable as some tax-saving strategies.
Effective tax rate management requires long-term planning and a breadth of knowledge. Navigating through the tax system to make the most of opportunities can be tricky, and it’s easy to miss out on strategies that could lead to significant savings.
Most private companies lack the in-house technical expertise to identify and implement these tax-saving strategies. In the end, finding the capital to reinvest in your business may be worth the long-term investment.
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