Home Business How to Optimize Corporate Taxation for US Businesses?
How to Optimize Corporate Taxation for US Businesses?

How to Optimize Corporate Taxation for US Businesses?


Business and entrepreneurship are the backbone of the U.S. economy. However, with the federal tax rate steadily climbing, the business sector, specifically small businesses and start-ups, has had a tough time expanding. The good news, though, is that U.S. corporate laws allow tax rates to be slashed by a considerable margin, provided certain measures are undertaken by the company. These are necessary measures that help optimize the tax slab for your business.

Avoiding Hefty Double Taxation

In cases where corporations are taxed on their net income and their investors are taxed yet again on the dividends that they have received in lieu of their investment, the policy implemented is known as double taxation. This is a policy that has come under fire since its early days, due to the fact that it has effectively discouraged investors from coming forward with necessary revenue and has, therefore, adversely affected the growth of small businesses. However, owing to legislative action to protect the interests of underdeveloped businesses, corporations with less than a certain number of stakeholders and investors, are spared double taxation.

The direct outcome of relaxing the implementation of the aforementioned policy has been the rapid rise in the number of entities like limited liability corporations, limited partnerships, and S corporations. On the downside, however, while private companies have prospered, the public capital industry in America has suffered tremendous loss in terms of both capital and revenue. As long as your company is classified as a non-corporate business, the tax leeway is yours for the taking. The skyrocketing of American finances in the past decade has, in fact, rested on the already-overburdened shoulders of the U.S. corporate sector.

Sales Tax Compliance Software

Sales Tax Compliance Software

Sorting out sales tax-related issues is a major headache for any corporation, big or small, private or public, largely, because of the fact that they are subject to frequent changes, depending on the prevalent rate, exemptions, holidays, and the like. Moreover, for small business owners, handling company affairs entirely on their own, the matter can be extremely confusing. For companies conducting business transactions in different parts of the United States, the tax bracket keeps on changing in accordance with the tax laws of the different states. All in all, the entire ordeal is highly prone to errors, which may, in turn, lead to penalties and delayed tax returns.

A sales tax compliance software, coupled with your present ERP, can automate tax calculations for each product sold by your company, in absolute compliance with appropriate tax laws, tax filings as well as remittance. A one-time investment can help save hours of manual labor, not to mention accurate and hassle-free tax clearances. Depending on a sales tax software, however, implies that you need to be on the lookout for recent updates and, consequently, allow the necessary upgradation to the software. Otherwise, the software will continue to function as per outdated tax laws.

Choosing The Right Tax Elections

An overview of most U.S. tax policies dictate that the amount noted as business expenditure is subject to deduction under tax filings, whereas profits, or the company’s net income, are generally considered taxable. The option of filing for accurate returns and the tax slab, corresponding to your company’s income, also allows you to select the nature and extent of both. Selecting the right options can turn your taxes around in your favor. For instance, expenses incurred in purchasing necessary equipment for your company is considered deductible, due to a depreciation allowance that can stretch over a period of five to seven years, or even longer.

The installment sale gain allows business owners to sell property while protecting the profits, in their entirety, from taxation. In such cases, the property has to be sold in installments, such that the total income stretches over a rather long period of time. Choosing the elective of filing the entire profit in the year of the sale itself despite the net profits not having been received as of yet enables you to cover present losses via the installment sale gain.

Separating Business And Personal Accounts

Separating Business And Personal Accounts

A typical problem, mainly prevalent amongst single-person businesses and startups, is that there exists only a single bank account for both business as well as personal usage. The matter gets even more complicated when there are credit cards involved. Keeping separate accounts for the two not only allows you to sort through them in a faster and more efficient manner, but also makes tax calculations and filings much easier. It is always a prudent move to keep an eye on the profita and losses of your business to ascertain whether or not the venture is proving to be a success, and this is, quite honestly, the best method to do so.

Your choice of a banking partner for your business account needs to be well-researched and foolproof. Business accounts, normally, experience a much larger scale of everyday transactions than personal accounts. So, you will need to undertake measures to check whether the bank of your choice has policies in place to secure your account, and whether their policies are ideal for your business. There are various types of business account services as well, so make sure that you choose the one that is best suited to your unique corporate requirements.

Giving Preference To Employee Benefits

Expenditure incurred to provide a better quality of life to employees are, usually, encouraged by the American government. This includes employee benefits, such as health care, dental coverage, maternity package, insurance, gratuity funds, and the like. Contributing to the betterment of these benefits makes your company an eligible recipient of tax deductions.

In fact, employee benefits should, ideally, get precedence over pay hikes for the simple reason that the former is a better option if you are looking to optimize your taxes. An increase in employee wages implies that both the employer as well as the employee would get taxed on the increment, by virtue of FICA, Medicare, and other such taxes.

If, however, you were to contribute the same amount instead to ensure, for instance, a better dental plan for your employees, it would not be deemed taxable. It goes without saying, of course, that this is not absolute and exceptions to the rule do exist. That’s why it would be wise to consult a chartered accountant or, at the very least, a corporate financial planner to help you decide and implement the best employee benefit package for your business, without having to compromise on valuable company revenue.

Backup Maintenance

Backup Maintenance

Other than a handful of small businesses, most American companies have gone completely digital, given the meteoric rise of relatively inexpensive, readily available, and efficient technology in the past decade or so. In fact, digitization was thoroughly encouraged by the government to provide the economy that much-needed boost. However, the downside to complete corporate dependency on technology is the fact that the machinery can stop working at any point of time. It is, then, imperative that you sustain and maintain proper fail-safe options to ensure that your company does not suffer and business continues smoothly, even in case of complete machinery failure.

While cloud storage is a viable option, questions have been raised regarding the level of security that it comes with. Moreover, cases where you are unable to access your cloud account, due to technical errors, should also be kept in mind. The best you could do is store your data, which should include financial records, important legal documents, receipts, employee details, permits and tax records, on various devices because chances of all of them failing simultaneously are quite low. Your backup options should also be properly arranged so as to revive smooth business operations as quickly as possible.

A Good Business Structure

Last, but not the least, the current structure of your business and whether or not it is appropriate to the current status of your business is an important determinant in the process of tax optimization. Adopting a suitable structure for your company during its formative years is, obviously, rather important, but what ensures that the business is developing on the right track and that its growth is not lopsided, is the ease with which its structure has been able to improvise and adapt with time. Although considered a gamble, companies should make it a point that, upon considerable growth, its structure doesn’t remain stagnant.

In case of small businesses, especially, where the proprietor gets to keep the entire profit, the companies are generally labeled as LLCs or S corporations. While, technically, this categorization is not entirely incorrect, it would be more advantageous if the company was registered as a C corporation instead. Since a C corporation falls under the purview of a lower tax bracket, the first $50,000 is taxed at a rate of 15%, as opposed to a hefty rate of 35%, which corporations belonging to a higher tax bracket have to pay.

Concluding remarks

While the topic of corporate taxation has been the subject matter of much debate, in recent times, with many arguing that businesses should be taxed more in order to secure a more equitable distribution of resources, the truth is that optimization of taxes is necessary for the corporate sector to expand, especially small businesses that rely on tax lee ways for survival.

Kenneth Wise I'm a professional life coach and I'm passionate about helping others to set goals and to achieve results. In these articles I'll try to share my experience with you. There will be different articles but all of them will help you to grow in life, business and career.


Your email address will not be published. Required fields are marked *