Smart Tax Planning: How To Stop High Rates From Choking Your Enterprise

by / ⠀Entrepreneurship / January 24, 2024
tax planning

Entrepreneurs are often optimists. As such, they almost always look at their gross profits and use that as the benchmark for whether they should invest in a project. However, more sober business leaders know that net profits are the real deciding factor. How much money they can make depends on the amount the government deducts. Ultimately, this metric is the one you should consider when investing in a project. While gross returns can provide helpful insights, you will acquire and use the net profits. Reducing the gap between gross and net profits is the ultimate goal of many entrepreneurs. Finding a way to access all of the returns from their activities is a smart business strategy for tax planning and enables faster wealth-building.

Start Tax Planning

While most large businesses engage in tax planning, only a minority of smaller enterprises consider it. However, waiting until the last minute isn’t always advisable. Once you accrue taxes, there is almost nothing you can do to reduce them legally.

The trick is to start working in advance, considering all your credits, deductions, and expenses. Once you understand how to leverage these, you can significantly cut and slash your costs.

Advise RE Tax is a consulting firm that advises real estate investors to slash their tax burden. Figuring out how much capital gains you need to pay and which filing status to choose is essential.

“Many investors and entrepreneurs come to us when they get their tax bill at the end of the financial year,” the firm says. “Most people are shocked by how much the government wants to take. However, many of these individuals could have taken action earlier to prevent these losses from accruing by using legal methods to reduce tax liability.”

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The tax code is complex, and only a minority of people understand it in its entirety. Therefore, many would-be entrepreneurs miss opportunities to reduce liability and narrow the gap between gross and net earnings. Staying informed of the latest changes to the code is possible, but experts can provide insights immediately, helping them remain up to date with alterations in the law.

Use Deductions And Credits

The next step is to take advantage of deductions and credits where it is prudent to do so. Many companies ignore the government assistance available to them, even if it could enable them to make more money.

Governments want to incentivize successful businesses in all sectors,” Advise RE says. “That means there are opportunities to save on taxes if entrepreneurs know where to look. That’s particularly true of the real estate sector where deductions and grants are available that reduce taxes and enable businesses to keep more of their profits, particularly when they contribute to the social good.”

Tax deductions are essentially expenses that business owners can subtract from their taxable incomes. These can include regular business expenses plus additional items that traditional accounting rules wouldn’t include in this bracket.

Tax credits are even better. These often contribute more to the deduction than the price of the item in question. For example, governments sometimes apply tax credits to R&D, meaning that companies can subtract the cost of research from their taxable income plus a bonus amount to reduce taxes further. Extremely generous governments may actually pay companies to carry out some research, increasing their profits.

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Companies looking to save money should also take advantage of depreciation rules. Subtracting the cost of the degradation of fixed assets from profits can enhance annual take-home pay further.

“Understanding depreciation is critical for real estate investors who want to lower their tax liability as much as possible,” Advise RE says. “Being able to reduce taxable profits by an agreed-upon depreciation amount of build assets improves real returns significantly and helps business owners offset the natural loss of value of their buildings over time. Even if physical structures wear out, additional profits are available for maintenance, which again become deductible expenses.”

Look For Government Grants And Incentives

tax planning grants

Governments will also sometimes offer various grants and incentives for small businesses. For instance, you might get tax relief for the first few years of operation if you are a small startup in an industry the authorities want to promote. You could also get additional funding if you set up in a deprived area or region set aside for economic regeneration. Low-tax regions can quickly form clusters of complementary firms that piggyback off each other’s success.

Structure Your Business Properly

“We also make a point of informing real estate investors on how to structure their businesses properly,” Advise RE says. “Getting the balance right can be a fantastic way to ensure long-term profitability and reduce the taxes individuals ultimately wind up paying.”

Incorporation can sometimes lead to lower overall taxes, but firms should speak to experienced accountants. Limited liability and lower tax rates are available with the right approach, but much of it depends on the business size.

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Invest In Tax Software

When running a business and trying to tame the tax beast, it can also help to install software. Modern products estimate your tax liability in advance, helping you see what you need to pay. You can also get regular updates on deductions and credits to react in real-time to new incentives as they arise.

Most accountants use software to automate calculations. It’s something your business can do, too. However, it still pays to consult with experts on where savings can be made. Many professionals use companies’ existing solutions to find further opportunities to save.

Use Joint Ventures And Subsidiaries

Finally, you might want to use joint ventures and subsidiaries to cut your tax bill. Leveraging these tools can have a profound effect on your overall profitability.

“Companies that structure themselves in the right way often see the biggest gains,” Advise RE says. “Getting the formation stage right can set up the business for long-term success and ensure that more of the money generated goes into the hands of those who earned it.”

Images provided by Icons8 Team and Mimi Thian; Unsplash; Thanks!

About The Author

April Isaacs

April Isaacs is a freelance writer and editor with over 10 years of experience. From the art scene in Paris to pastures in Montana, April has covered individuals' stories and can confirm that no two stories are the same.

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