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. But there are a number of ways to reduce corporation tax quickly and easily—just 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. Your taxable 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 includes understanding how to reduce corporation tax by lowering your taxable income.
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.
5 easy ways to reduce corporation tax
There are many ways for SMBs and enterprises to achieve tax cuts through legal tax avoidance. And as luck would have it, some of the best corporate tax strategies also happen to be some of the easiest for smaller taxpayers to action.
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 has muddied the line between personal vs 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 spend 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 a smart, efficient small business expense management system 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 spending
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 a must 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. By pairing the right tool or platform with your accounting software, you can avoid missed deductions and filing deadlines.
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 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, cancelled 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.
Large corporation vs small business tax liabilities
A big part of learning how to do small business taxes is knowing how to boost corporate tax deductions. Some owners and operators find it hard, however, 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.
C corporation tax structure
- C corporations pay federal income tax on their profits at the 21 percent corporate tax rate
- Profits are sometimes double-taxed: Once at the company level, and again on the personal tax returns of shareholders (owners) receiving company dividends or salaries
- C corporations require more extensive record-keeping and reporting than unincorporated businesses, but can raise capital through the sale of company stock
S corporation tax structure
- S corporations aren’t generally subject to federal income tax or corporate tax rates
- Much like sole proprietorships or partnerships, corporate income, losses, and deductions pass through to the shareholders (owners) for federal tax purposes
- S corporation owners must report any profits as part of their personal income, but can often claim the 20 percent pass-through business deductionAccording to the internal revenue service, your S corporation may also be liable for estimated, employment, or excise taxes in certain cases.
Wondering how to reduce corporation tax to the max? Start with Ramp’s smart expense management
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 1.5 percent 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 a multitude of time-consuming tasks, Ramp makes it easier for you to focus on reducing your corporate tax liabilities.
Corporate tax can help or hinder companies that rely on investors for capital, thus affecting the share (or stock) market. Higher tax, for example, means less profit and a lower return for investors. This can reduce interest in buying stock, making it harder for corporations to sell company shares when they need to raise funds.
The biggest benefit of reducing corporate tax is that it results in more profits for owners and shareholders. By paying out higher dividends, corporations can attract more investors. Owners can also redirect a higher portion of profits back into the business, increasing its long-term growth and overall value.
Unlike higher rates that discourage the purchase of company shares, a reduced corporate tax rate would be more likely to attract and reward investors with higher, profit-driven returns. Lower rates can also help discourage profit shifting. This happens when multinational companies try to reduce their corporate tax liability burden by moving profit generation from high-tax to low-tax jurisdictions (often outside the US.)
Based on US tax reform legislation that permanently reduced the 35 percent rate for tax years beginning after 31 December 2017, the corporate income tax rate for 2022 is currently 21 percent.
On 28 March 2022, however, the federal government proposed changing the corporate tax rate from 21 percent to 28 percent for taxable years beginning after December 31 2022. This could increase the rate for 2023.