Tax Planning Strategies for Corporations-Part 2
Tax Planning Strategies for Corporations-Part 2 | Simkover and Associates Chartered Accountants
There are many areas that can be addressed on this topic, so for the purpose of this article we will select a few of the more common items that often apply to the particular situation at hand. One of the most frequent items to come up is executive compensation, and in particular the choice of bonus versus dividend. Bonuses are equivalent to salary from a tax perspective, and are therefore an expense of the company. Dividends are a distribution of retained earnings of the company and are not an expense of the company. Both bonuses and dividends are taxable income to the individual, but dividends are often taken into personal income at a lower tax rate than bonuses. The down-side is that they do not reduce the corporate taxes the way bonuses do. There is no easy answer to which approach results in a lower total tax burden for the company and individual combined, since the result differs in each case, depending on the personal tax rate applicable for the individual's total income as well as for the corporate tax rate in effect at the time.
However, it is generally recommended to pay sufficient executive bonuses to reduce the corporate active business income below the small business threshold of $500,000, to obtain the lower rate of tax. Although this will increase personal income tax for the individual, the corporate tax saved should more than offset this.
Another area of tax planning is the overall level of revenue and expenses for the corporation. It is common for business executives to feel that taxes can be reduced by finding ways to increase expenses and/or reduce revenues. There is not that much leeway on the revenue side, because generally accepted accounting principles require that revenue be recognized on a consistent basis from year to year, and therefore you cannot defer revenue to the next fiscal year just because you feel your taxes are too high. However, it is sometimes possible to invoice a customer on the first day of the new fiscal year instead of the last day of the prior year, as long as the service was performed or the goods were shipped on the later date as well. For expenses, good tax planning requires that you accrue all the expenses that pertained to the fiscal year in question, even though the bills have not yet been paid or even received. A good procedure is to scan all the expenses that have been recorded in the first month of the following fiscal year, in order to accrue back the ones that logically pertain to the prior year, and reduce corporate taxes accordingly.
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