The goal of every taxpayer is to attenuate Tax Liability. To accomplish this objective taxpayer may resort to the following Three Methods :
1. Tax Planning
2. Tax Avoidance
3. Tax Evasion
Now let us discuss the essential method to manage tax liability i:e Tax Planning
Tax planning is all about analyzing the financial status from a tax perspective. The purpose of planning tax strategies is to ensure tax efficiency. Tariff planning makes all elements of the business plan work together in the most tax-efficient manner possible. Tax planning is a crucial part of a financial plan. In short, Tax planning means a reduction of tax liability by way of exemptions, deductions and benefits.
Types of Tax Planning
1.Purposive Tax Planning:
Planning tax strategies with a particular objective in mind. It means making plans with a specific purpose to establish the availability of maximal benefits to the assessee through correct choice of investment, making apt programme for replacement of assets, varying the residential status and diversifying business income and activities etc.
2.Permissive Tax Planning:
Permissive tax planning is under the framework of the law. Permissive tax planning refers to plans which are abided by government laws, such as
1.Planning of earning income covered by Sec.10, especially by Sec. 10(1)
2.Planning of taking advantage of various deductions and incentives
3.Planning for availing various tax concessions etc
3.Long Term Tax Planning:
Long-range tax planning means a plan which is made at the beginning of the income year. This type of planning helps a company by assisting in the long-run and generally does not have an immediate effect.
4. Short Term Tax Planning
Short-range Tax Planning means the plan thought of and executed at the end of the income year to reduce taxable income legally.
Advantages of Tax Planning
Tax planning strategies are consistently employed to help a business achieve their financial and business goals. There are benefits of tax planning for both large and small companies, and plan plays a vital role in:
1.Lowering the amount of taxable income
2.Reducing the tax rate
3.Allowing more significant control of when taxes get paid
4. Maximizing tax relief/tax credits available
Types of Tax
1.Corporate income tax
4.Personal taxes for nationals and expatriates
6. Value-added tax
7. Customs duty
9.Municipal or property taxes
10.Hotel tax and tourism levies
Tax System In UAE
In UAE tax is paid quarterly (4 times a year) and it takes 12 hours for administration process. The tax year starts from 1 January and ends on 31 December. Companies should provide an annual activity report audited by an auditor to the Ministry of Finance (for trading companies) or the Ministry of Industry (for industrial companies). Below table gives details of different tax brackets.
corporate tax(except for oil and gas companies and subsidiaries of foreign banks)
0%(There is no tax levied by Federal Government on income or wealth of companies and individuals)
Income < AED 1,000,000
AED 1,000,000<=Income <= AED 2,000,000
AED 2,000,000<=Income <= AED 3,000,000
AED 3,000,000<=Income <= AED 4,000,000
AED 4,000,000<=Income <= AED 5,000,000
Income >= AED 5,000,000
Tax on profits made by branches of foreign banks
Tax applicable for all the companies: the duty deducted by the municipality in each emirate at the time of issuance or renewal of trade licence
10% of the annual amount of the rent of offices and warehouses and 5% of the annual amount paid by a company to accommodate its employees.
Tax Filing Strategies
Each form of business- Partnership, Sole Proprietorship, Corporation, S corporation, and LLP companies- have specific sets of filing rules.
1. Maintain Records of Receipts and Documents of Tax Payments
A small business generally includes office supplies, furniture costs, training costs, travel costs, insurance costs, and so on. Maintaining an appropriate record of all the payments makes the tax filing process a cakewalk. Here are some of the methods of record-keeping,
The three Main Record-Keeping Methods Are:-
Accrual accounting measures the position of a company and performance by identifying economic events irrespective of when cash transactions occur.
Under the cash accounting, returns for the sale of services or goods are noted in the books of accounts and reported on your tax return in the year actually or constructively received. Expenditure is recorded in the books and reported on your tax return in the year paid.
The hybrid method combines the cash and accrual methods of accounting. For example, the accrual method could be used to account for inventory held for sale and the cash method to account for business expenses.
2. Contribute to a Retirement Plan
When you start making profits for your business, it is better to invest in some retirement plans for staff members. Retirement plans are tax-deductible, specifically the monthly contributions your business makes. Retirement planning reduces income, thereby reducing tax payments. If you have not yet started a retirement plan for company admin and staff members, then talk to a financial advisor to decide which strategy could be best.
3. Make Contributions to Charities
Contributions to a charitable organization are suitable for a small business. Take note: there is no need for you to provide money. For goods or services, it is imperative to claim deductions based on fair market value. Make sure you furnish the proper documents and receipts.
4. Choose the Right Tax Advantages
When selecting the correct tax deductions, it’s essential to be smart. For instance, rather than deducting the cost of acquiring machinery and equipment in full, it would be better for your overall tax situation to spread the purchases across several tax years instead of deducting the total purchase price in one fiscal year.
5. Defer Income and Accelerate Expenses
Many small businesses operate on the method of cash accounting. This method is where revenue is recognized after receiving the cash, and costs are organized during payment time. This method also offers the small company owners the opportunity to accelerate expenses at year-end defer income and, which can help decrease their tax burden.
6. Increase Travel Expense
If your business involves a lot of travelling, then you may be able to reduce your business taxes. Taxes regarding business travels can be fully deductible. If you combine personal expenses with business travel expenses, then you can get an increase in your tax deductibles.
7. Claim The Work Opportunity Tax Benefits
If your company is eligible, this claim can be beneficial to your tax filing and is available to those who hire disabled people, veterans, and other disenfranchised groups.
8. Claim a Credit if Your Business Provides Child-Care Expenses
If your company pays for your employees’ child care expenses, you can receive a tax credit.
9. Deduct Certain Property
Section 179 is a tax claim that allows small businesses to crosscut the complete purchase price of machinery in the year it was purchased.
10. Consider a Section 1031 Tax-Free Exchange
By using a Section 1031 tax-free exchange, you could avoid state and federal income taxes on the sale of your operational assets, office building, or other real estate held for business or investment purposes.
11. Hire Your Spouse
Employ your spouse and pay him or her an annual salary of a minimum amount. By doing so, you can entitle your spouse for minimal, the Child Care Credit, Social Security benefits, as well as fully deductible practice travel and fringe benefits, while minimizing payroll taxes.
12. Be Generous to Your Kids.
Transfer appreciated property that you plan to sell, to your children age 19 or older, or children who are full-time students ages 19-23. After that, they can sell this appreciated property and have the capital gain taxed at rates as low as 0% of their earned income equals more than half of their support, and use the revenue to fund educational costs.
Tax filing involves tons of rules and regulations. Proper management of tax filing can help in getting tax benefits. Get skilful help from an accountant or financial planner, who will work with you to augment your refund and fill up your tax return on your behalf. Jaxa Chartered Accountants would be happy to assist you with your company’s other accounting, VAT, bookkeeping and taxation related service needs. For further queries or assistance contact us!