What could be better than owning a small business? You get to make important business decisions but without the pressure of running a gigantic corporation. You get to lead a few employees with benevolence and wisdom. You get to panic come tax time when you realize that what the government is asking for is more than you planned — and you’re the one in charge of figuring out how to make it work. So perhaps it’s not all fun and games. In this blog post, we’ll explore some tips to make your small business feel a little more substantial during tax season. But you don’t have to worry about it, we’ve got you covered!
5 Tax-Saving Tips for Small-Business Owners
When you are in charge of a small business, it can feel like you are responsible for everything – from marketing and product development to payroll and taxes. Some basic knowledge of the tax system can go a long way toward helping you navigate this annual process, but there is no replacement for a knowledgeable expert. Consult your tax specialist for insight and follow these tips to make it through the tax season.
Tip 1 – Hire the Right Accountant
Your accountant should offer to do more than just prepare financial statements and do your taxes, if that’s all they offer to do, then they aren’t the right accountant for a small business. Your accountant should work with you throughout the year to track income and spending, to make sure you don’t have a cash flow problem, and to monitor your gross and net profits. Work with your accountant from day one of opening your business, not just in March and April for tax season.
Tip 2 – Keep Adequate Records
Keeping thorough and accurate records throughout the year will ensure your tax return is correct. With inadequate record-keeping you could be leaving deductions on the table or, worse, you could be putting yourself at risk for an audit. It is recommended every business invest in a basic version of accounting software because it is user friendly, inexpensive, and helps you keep track of all your income and expenses. Even though you may use a casual approach to recordkeeping for your personal taxes, you can’t do this for business.
Another way to keep records is to make sure you collect, and store required receipts and other proof of expenditures. Set up file systems to categorize your receipts (e.g., car-related expenses, meals and entertainment costs, and capital expenditures).
If you use your personal vehicle for business, you need to track your business mileage in a diary or logbook. If you have employees and reimburse them for their business-related car expenses, explain how to them how records must be kept.
Tip 3 – Don’t Overlook Carryovers
Certain deductions and credits have limitations that can prevent you from using them fully in the current year but could permit a carryover to future years and carryovers are a way to reduce taxable income. Keep track of carryovers so that you won’t forget to use them in future years. This is done automatically by most tax preparation programs and should be done by tax professionals you may use. Examples:
- Capital losses
- Charitable contribution deductions
- General business credits
- Home office deduction
- Net operating losses (limited to 80% of taxable income)
Tip 4 – Change Your Business Structure
As a small business owner, you don’t have the benefit of an employer paying a portion of your taxes. If you’re doing business as a sole proprietorship or partnership, it may be time to pick a new business structure. Many small business owners choose to do business as an LLC (Limited Liability Company). Why? Because it’s considered a “pass-through entity” that offers significant flexibility for the tax treatment of your business income.
If your business is taxed as a Limited Liability Company (LLC), you still have to pay medical taxes, though in certain circumstances you may be able to eliminate the employer-half of this tax responsibility. This might be a wise switch for some small businesses. While there are many things to consider in this switch, such as paying yourself a reasonable salary and other associated risks, it can be a good way to reduce your taxable responsibility.
Tip 5 – Avoid Penalties from Late Payments
This may be a simple concept, but it’s still a key issue and one of the most important business tax-savings tips. Late payments can be avoided in a variety of ways. Getting your documentation together early in the year can prevent last-minute filing and unforeseen expenses. Short-term working capital and business tax debt loans can help you cover tax payments and avoid late fees.
Types of Business Taxes in the UAE
The UAE currently has no system of federal income taxation. Instead, most of the emirates – including Dubai – enacted their own corporate tax decrees in the late 1960s. These emirate-level decrees are of general application and remain in force as amended. These corporate tax decrees are similar in nature and text and deal in broad terms with the identities of taxable persons, rates, administration, taxable profits, and loss relief. It is advisable that you, as a business owner, understand your responsibilities to help you meet them on a timely basis and avoid costly penalties for failing to act on time.
Corporate Income Tax
Corporate income tax is only enforced on oil and gas companies engaged in upstream activities, certain petrochemicals companies, and, under separate banking tax decrees, branches of foreign banks.
There are no withholding taxes in the UAE or in Dubai.
Capital Gains Tax
There is no capital gains tax in the UAE or in Dubai. For taxpaying entities, capital gains are taxed as part of business profits.
Personal Income Tax
No system of personal taxation currently exists in the UAE.
The UAE social security regime applies only to GCC and UAE national employees. Social security levies and rates are administered differently by each emirate.
Municipal & Property Tax
A 7% municipal tax is imposed on hospitality and entertainment services. Most municipalities impose a tax on properties that is usually assessed with reference to a property’s annual rental value. It is generally the tenants’ obligation to pay the tax. In some cases, separate fees are payable by both tenants and property owners. In Dubai, the municipality tax on the property is levied at 5% of the annual rental value for tenants, or at 5% of the specified rental index for property owners.
Unable to Keep up with the Taxes? Contact Riz and Mona Consultancy
We believe that filing taxes is a very important part of every business. Riz & Mona Consultancy has been in this domain for many years now and has served several clients across the United Arab Emirates. Our team comprises certified professionals who provide the best services in the industry. Our consultants are updated with the changing market scenarios and are skilled to work on emerging tools and technologies. By outsourcing your requirements to us, you can save your costs and concentrate more on your core competencies.