The primary tax responsibility of a small business firm is to pay all legally required taxes. In paying taxes, the firm is both an agent and a debtor.
As an agent, it withholds and pays taxes owed by others. As a debtor, the firm pays taxes for which it is directly liable.
[i] Tax-Withholding Obligations of the Small Business
The major tax-withholding obligations of a business involve the following taxes:
- Income taxes: Each employee signs a v/withholding exemption certificate which specifies the number of allowable exemptions. The amounts withheld are passed on to the government periodically by the employer.
- Sales taxes: Many state and local governments impose sales taxes. A business firm must collect and pass them on to the appropriate governmental agency.
- Social security taxes: An employer is required to deduct a specified amount from each employee’s salary, and this amount is also passed on periodically to the government by the employer.
[ii] Possibilities for tax savings of the small business
Tax savings are possible if one knows the law and all of the permissible tax “loopholes” which it affords. Legal tax evasion is not immoral and is certainly practical.
The small business firm, while relying primarily on tax experts for assistance, may also supplement this assistance by reference to tax articles in periodicals, pamphlets, books, or loose-leaf tax services.
The size of the business, of course, will determine the amount which will be spent in the accumulation of such a tax data library as well as the time available for its use.
One example of possible tax avoidance is found in the leasing of equipment on a graduated rental basis by a new small manufacturing firm. The manufacturer avoids the payment of taxes on the equipment.
On the other hand, the purchase money could be borrowed on an intermediate-term loan basis from banks, with deductible interest expense, but in this case, interest constitutes a fixed charge and might be difficult to pay if sales do not come up to expectations.
In the growth enterprises in particular, where earnings are fully retained, the owner pays only the capital gains tax if the investment is retained for more than nine months.
Such a substitution of capital gains tax for the much higher income tax can effect substantial savings.
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