Tax saving strategies
Here are some tax saving strategies that you might find useful when running your franchise business:
- TAX REDUCTION
Tax reduction occurs when you take action that results in payment of less tax than would otherwise have been due. For example, if you switch funds from a taxable investment (like a corporate bond) to a municipal bond that earns tax-free interest or to preferred stock that pays a dividend qualifying for a low tax rate, you will reduce your tax bill. Or you may want to consider contributing to an investment that can generate tax-free income instead of putting the money into a taxable investment vehicle. Another option is to shift funds from an investment such as a money-market account, which produces ordinary income, to a stock fund in hopes of earning some lower taxed dividends and long-term capital gain.
- TAX DEFERRAL
Tax deferral is achieved when you earn income now and pay tax on it in the future. Yourretirement plan is an example. Although your retirement investments generate income throughout the years (with some years, like a couple of the recent ones, being unfortunate exceptions), they are generally taxed only when you receive them. Deferring the receipt of taxable income can save you money, even if it produces little or no tax savings, because you can use your money longer before paying the BIR. That means greater compounding of earnings for you. On the other hand, accelerating income, even if you think you will be in a higher tax bracket in later years, means you will pay the BIR sooner than otherwise might be required. Loss of the use of that money cuts down on the advantage you hoped to attain.Another deferral technique is to accelerate deductions from a later year to an earlier year so that you get their benefit sooner. But don't "over-accelerate" deduction items to defer taxes. Remember that to get the deduction sooner, you usually have to lay out the amountsooner, which means you lose the use of those money.
- INCOME SHIFTING
Income shifting generally involves transferring income-producing property or investment to someone who is taxed at a lower rate. One example is giving a corporate bond to a family member who is in a lower tax bracket.
- ACCELERATING DEDUCTIONS
Accelerating deductions into an earlier year gives taxpayers their benefits sooner. If tax rates are higher in the earlier year, the deduction also is more valuable because it offsets income that is taxed at a higher rate. Your goal is to use deductions to their full potential, keeping in mind that itemized deductions provide a tax benefit only if their total is more than the standard deduction amount.
- DEFERRING INCOME
Deferring income from one year to the next can be a very effective tax-planning strategy, especially for those in high tax brackets, because they will save the most. For tax purposes, many two-income families qualify as high-income individuals. Almost all individuals report their income and deductions using the cash method of accounting (in which income is reported in the year it is actually or constructively received, and expenses are deducted in the year they are paid), which gives quite a bit of flexibility in using tax-deferral strategies.
The key to saving from income deferral is that income is not taxed until it is actually or constructively received. For example, if a taxpayer does work for others, he or she will not be taxed until the year in which payment is received. So, deferring billing at year-end will result in more income being received and taxed in the following year.