How to reduce your corporation's tax liability

Every corporation can benefit from reducing its tax liability burden. After all, the less your business pays in taxes, the more profit you get to keep and the more attractive your company becomes to potential investors.

Some corporate tax strategies are complicated. Many require a long-term approach to tax planning and work best with the help of a finance professional who knows the tax code. However, there are many ways to reduce corporation tax, such as by making smarter spending and expense management decisions.

What are corporation tax liabilities?

Corporation tax liabilities are the amount of tax your business owes the government for a given period of time. Corporation tax is paid locally, at the state level, and to the Federal government.

With the current tax system, for example, legal corporate entities in the US:

• Pay annual federal income tax at a rate of 21 percent
• Pay state corporate income tax that varies by region but ranges from zero to 11.5 percent
• May pay local or state gross receipts taxes instead of—or in addition to—corporate income taxes

Corporations are taxed on the profits they earn. Yourtaxable income determines how big a tax bill you’ll pay when it comes time to calculate quarterly taxes.

Lowering your taxable income

One of the simplest tax strategies for business owners is to understand how to reduce corporation tax by lowering their taxable income.

Loosely speaking:

Your company’s taxable income = Your annual revenue – Your [Cost of Goods Sold (COGS) + Depreciation + General operating costs and business expenses]

So, anything you can do to maximize your business expense deductions will lower your taxable income—and move you closer to paying minimum tax.

How to reduce corporation tax

There are many ways for SMBs and enterprises to achieve tax cuts through legal tax avoidance. As luck would have it, some of the best corporate tax strategies also happen to be some of the easiest for smaller taxpayers to implement.

A great place to start, for example, is by:

• Understanding which small business tax deductions you can claim according to tax law
• Spending and investing to maximize these tax breaks
• Investigating other business tax credits and incentives for which you may be eligible

Overall, using deductions to lower taxable income is one of the easiest ways to reduce corporation tax. That said, here are five simple steps you can take to maximize your business deductions through smart expense management.

1. Funnel every expense directly through your business

Many small business owners are guilty of paying for out-of-pocket expenditures from their personal funds.

This usually happens because:

• It’s simpler and more convenient in many cases to use personal cash or charge cards for small or unplanned purchases
• It’s a habit held over from using personal savings to start their company
• They’ve yet to separate their personal bank account from their business account

Even small, unreimbursed expenses can add up over the course of a year, however. And without a proper purchasing channel, you could have trouble claiming these amounts as a deduction against business income.

Do you frequently lose paper receipts? Or perhaps commingling accounts have muddied the line between personal and business expenses, making it difficult to show proof of legitimate deductions?

To minimize taxable income, it’s important to funnel and support all corporate spending through your business account. One of the easiest ways to do that is by using a business credit or corporate card that’s accepted everywhere so you can keep all your spend in one place.

2. Implement a clear-cut set of employee-spend policies

Setting and managing employee-spend policies ensures only authentic, approved expenses flow through your business—expenses that are more likely to qualify as income deductions.

A well-constructed employee-spend policy is:

• Informed: The first step to claiming eligible spend is knowing which employee-paid business expenses are deductible (you may, for example, be able to claim “ordinary and necessary” business supplies, meals, or work-related travel expensed by your staff)
• Easily understood: Digitizing your expense approval policies and spend guidelines ensures they’re accessible to every employee, all the time
• Enforceable: Developing internal controls (like a robust expense report approval process, for example) that automatically enforce spend rules, limits, and category restrictions makes it easier to flag out-of-policy items for review and prevent disallowed employee expenses

Maintaining control over employee spending with a documented policy will help you manage your business expenses more proactively. It’s also one of the simplest ways to reduce corporation tax.

3. Use a smart expense management system

Reducing corporate tax starts with maximizing deductible expenses. That makes prioritizing smart, efficient small business expense management software a wise business move.

When you manage expenses manually, it can:

• Lead to transcription and data entry errors
• Slow down expense categorization, bill payments, and records storage and retrieval
• Make it difficult to stay on top of wasteful, irrelevant, or non-deductible business expenses

Automating your receipt submissions and business expense tracking saves time and money. It also ensures all the data you need to make expense deduction claims is right at your fingertips.

Taking advantage of intelligent automation, for example, allows you to:

• Submit expense receipts by app, text, or email the moment you spend
• Categorize and sync every purchase transaction in real time
• Automatically collect, verify, and reconcile employee expense report charges

Ideally, the expense management solution you choose should provide full visibility into your business spend. This will make it easy to determine how to reduce corporation tax.

4. Streamline expense allocation and reconciliation

Keeping your books organized and up to date is necessary for making the most of tax reduction opportunities.

If, for example, your expense allocation is haphazard or incomplete—or you keep falling behind on your monthly reconciliations—you could be cutting into your tax savings by:

• Missing out on potential expense deductions completely
• Incurring interest or penalty charges for paying taxes or filing information returns late
• Forfeiting the vendor discounts for remitting state sales tax payments on time or early

Finance automation streamlines expense allocation and speeds up month-end close procedures. You can avoid missed deductions and filing deadlines by pairing the right tool or platform with your accounting software.

Just make sure you choose a solution that makes it easy to upload receipts or digital expense transaction records. If it also lets you create smart rules for auto-categorizing and syncing your expenses to your GL, so much the better.

5. Prepare and maintain a clear expense audit trail

Being prepared to prove your expenses in the event of an IRS audit is essential for hanging onto the tax benefits you’ve claimed. It also helps prevent being penalized for questionable deductions.

For corporate tax strategies that stand up to tax policy scrutiny, make sure your expenses are:

• Documented: Know which types of source documents (receipts, invoices, canceled checks, etc.) are accepted or required as proof of expense deduction claims (proving billable expense income, for example, is an important distinction for tax purposes)
• Accessible: Ensure data accessibility by automating the collection and storage of purchasing records
• Organized: Construct complete, accurate audit trails for all your expenses by keeping records organized and up-to-date

One of the best ways to pull together and maintain a clear audit trail is with an expense management platform. Look for a system that connects your spending cards and rules to your bill payments, accounting records, and data storage.

Tax strategies for different business types

Knowing how to boost corporate tax deductions is a big part of learning how to do small business taxes. However, some owners and operators find it hard to understand which tax liabilities apply to their type of business.

For a start, the bigger your corporation, the more you’ll benefit from working with an experienced tax preparer or planner to leverage deductions related to:

• Accelerated depreciation
• Stock acquisitions
• Research and development (R&D) investment
• Tax havens and foreign subsidiaries

At the same time, not every small business is structured as a full-fledged C corporation. In fact, about 4.6 million businesses in the US function as S corporations.

If you own an S corporation, you should know that these businesses aren’t always recognized or treated equally at the state or local tax level. Federally speaking, however, you gain a big advantage by avoiding double taxation.‍

Here are some key factors that impact tax strategies for business owners of these two different corporation structures.

S corporations: Pass-through taxation

An S corporation is a pass-through entity, meaning you pass profits and losses directly to shareholders who are taxed at their individual income tax rates. Here’s how you can reduce taxes as an S Corp:

• Section 199A deduction: S corporations can take advantage of this deduction to reduce qualified business income by 20%. However, this deduction may be limited for higher-income owners.
• Salary vs. distributions: S corp owners must pay themselves a reasonable salary, but they can also take distributions that are not subject to self-employment taxes

Example: A consulting firm set up as an S corporation can benefit from the Section 199A deduction to lower the income tax rate on business income.

Limited Liability Companies (LLCs): Flexible tax options

LLC tax benefits are flexible. By default, LLCs are taxed as pass-through entities, but they can also elect to be taxed as C corporations or S corporations.

• Pass-through taxation: LLC owners can benefit from pass-through taxation, avoiding double taxation
• Electing C corporation status: LLCs may choose to be taxed as a C corporation to benefit from lower corporate tax rates on retained earnings

Example: An LLC running a real estate investment business may benefit from electing C corporation status to reinvest profits at a lower corporate tax rate.

Partnerships: Tax flexibility for multiple owners

Partnerships also benefit from pass-through taxation. Partnerships have flexibility in how they allocate profits and losses.

• Allocating profits and losses: Partnerships can allocate more losses to partners with higher personal income, reducing their overall tax obligations
• Section 704(b): Partnerships can use this section of the tax code to allocate income and deductions based on the partner’s contribution

Example: A law firm structured as a partnership might allocate income to partners with lower tax rates to minimize the overall tax liability.

At-a-glance summary

Start reducing corporation tax to the max

Maximizing tax deductions through smart expense management and solid employee-spend policies is easy with Ramp’s corporate cards and finance automation.

Not only can you bump up corporate tax savings with cashback, but Ramp also automatically categorizes and syncs every expense transaction in real time, flags out-of-policy spend issues, and provides the receipts and accounting data needed to record and close your books faster.

By taking over many time-consuming tasks, Ramp makes it easier for you to focus on reducing your corporate tax liabilities.