What is the Tax Benefit?

Explanation

A business must pay taxes to the government on the income generated in the fiscal yearFiscal YearFiscal Year (FY) is referred to as a period lasting for twelve months and is used for budgeting, account keeping and all the other financial reporting for industries. Some of the most commonly used Fiscal Years by businesses all over the world are: 1st January to 31st December, 1st April to 31st March, 1st July to 30th June and 1st October to 30th Septemberread more. The rate of taxes varies depending on the country and industry in which the business is being done. A business can use specific provisions of the country’s tax legislation to reduce the said tax payment to the government.

Utilizing the tax benefit is essential to put the funds available for the best utilization. The amount of tax saved can be used for further business expansion. It is to be noticed here that the tax-saving has to abide by the terms mentioned in the tax legislation; otherwise, it might lead to evasion of tax which has legal implications.

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Tax Benefit Forms

Tax benefits may be obtained in the following forms.

#1 – Tax Exemption

In this scenario, the entire income earned will be non-taxable. It happens because of the unique condition through which the income is earned. For example, to uplift the economic condition of a particular under-developed city, the government may exempt the income from taxation for three years if any business works out from there. In that scenario, if the business earns a total income of $40,000, the entire amount will be exempt from taxation, and the tax payable will be nil.

#2 – Tax Deduction

Here, a portion of the income will be reduced when calculating the income amenable to taxation. It could be because of certain special expenditures that the business might have done or certain capital assets that the business might have purchased, which the government intends to promote for greater use. For example, the firm’s total income might be $115,000, and there is a special tax deduction of 50% of the value if there’s a purchase of Govt. manufactured machinery licensed as environment-friendly. Let’s say the machinery cost, in this case, is $10,000. Now, the business will get a benefit of 50% of the amount expended on this machinery, which comes to $5000. Therefore, the total income that is taxable will be $115,000-$5000 = $110,000.

#3 – Tax Credit

In this case, there is no difference in the income that is being taxed. Instead, there is a rebateRebateA rebate is a cashback to the customers against the purchase as a completing transaction incentive. Rebates are offered after the sale. Thus, it is a form of marketing strategy provided to the client to facilitate future transactions.read more on the taxation that is paid. It might arise because of the previous tax credit or the fulfillment of other special provisions. For example, a business earns a total of $150,000, on which it is liable to pay tax at 20%. The tax payable amount will come to $30,000. Now, let’s say there was a pending taxation suit from the last year whose decision took place in the current year. Last year, an excess of taxation of $4,000 was paid. So, this year the business will get the credit. Hence, the actual taxation payable will come to $30,000 less $4000, equal to $26,000.

Example of Tax Benefit

  • Business XY is into the business of providing readymade garments for men. The gross revenue for the financial year 2019 totaled $1,500,000, whereas the total expenses accruedExpenses AccruedAn accrued expense is the expenses which is incurred by the company over one accounting period but not paid in the same accounting period. In the books of accounts it is recorded in a way that the expense account is debited and the accrued expense account is credited.read more to $650,000. The net revenueNet RevenueNet revenue refers to a company’s sales realization acquired after deducting all the directly related selling expenses such as discount, return and other such costs from the gross sales revenue it generated.read more, therefore, is $850,000. The tax slab for all the businesses is at a flat 20%. However, the business also involves itself in social-welfare activities. It built a community home worth $20,000 and gave donations to sick homes worth $35,000. Now, the government has given a tax deduction of 50% on donations and 75% on expenditures for the social community.So, in this case, out of total revenue of $850,000, which should have been originally taxable, the business will benefit from the donations and the community homes it has built. The deduction on donations will be 50% of $35,000, which is $17,500, and the deduction on community housing is 75% of $20,000, which is $15,000.Therefore, the income that will be taxed will be $850,000, less $17,500, less $15,000, which is equal to $817,500. A 20% charge on this amount would mean total taxation of $163,500. It is to be noted, though, that the expenditure on community homes and donations must fall under the approved list with the government. It is done so that the businesses may not come up with fraudulent organizations of their own to evade taxes.

Tax Benefits of Health Insurance

Almost all countries promote the concept of providing health insurance either for oneself or employees. The amount expended on the premium for such health insurance is available as deductions in the calculation of taxable income. The amount that becomes eligible as a deduction could be an absolute number or an allowable percentage limit.

For example – The premium on health insurance of the employees may be allowable as deductions from taxable income to the maximum of $10,000 or 10% of the gross taxable income before such expenses, whichever is lower. So if the gross taxable amount is $90,000 and the expenses on medical insurance are $12,000, the amount that will be eligible for deduction will be a flat $10,000 or 10% of $90,000, which is $9,000. The latter will become the eligible amount because it is lower, so the final taxable income will be $90,000, less $9000, equal to $81,000.

Conclusion

A business needs to plan the expense that will help it to reduce the tax burden, either in the form of exemptions or deductions. Smart planning and the use of specialized services where the internal management lacks the knowledge help utilize the best procedures available and better use the government’s provisions. Apart from saving funds, it provides an excellent message to the stakeholders that the management is proactive in planning and creates a cordial relationship with the regulators and the government.

This article has been a guide to what tax benefits are and their meaning. Here we discuss the tax benefits of health insurance along with an example and forms. You may learn more about financing from the following articles –

  • Tax Break TypesTax WedgeHow does Tax Court works?Corporate Tax Examples