5 Ways Small Business Owners Can Reduce Their Tax Bill

Your corporate tax filing date might technically be months away, yet a little foreplanning on your part won’t hurt. They say a stitch in time saves nine, and you’ll find it can save money too. 

We recently sat down with reputed UAE tax consultant Wahaj Siddiqui, who shared these top five tips on how small business owners can reduce their taxable income. 

1. Choose the right business structure. 

Your company’s structure has a significant impact on your tax obligations. While a tax professional can help you choose wisely, here’s a brief overview of different business structures:  

Sole Proprietorships

In a sole proprietorship, business income is reported on your personal tax return, as the business isn’t a separate legal entity. You, as the owner, are fully responsible for all taxes, debts, and legal issues.

Partnerships

Partnerships are pass-through entities, so the business itself doesn’t pay income tax. Rather, the business transfers profits and losses to the partners, who then report their shares on their personal tax returns.

LLCs

A limited liability company (LLC) is a separate legal entity with flexible tax filing options. Qualifying LLCs can be taxed as a sole proprietorship or partnership and be included in the owners’ personal tax returns. Alternatively, they can choose to be taxed either an S corporation or a C corporation. While S corps and C corps may offer tax benefits for some businesses, they often require more complex tax filings.

2. Identify deductible business expenses. 

Even if it’s impossible to determine the business usage, most corporate tax regulations allow deducting business expenses, not long-term investments. However, nondeductible taxes, unrelated to business income or losses, are not exempt. 

The general interest deduction rule permits deducting up to 30% of earnings before taxes, interest, depreciation, and amortization (EBDITA), resulting in a significant reduction in tax owed. You can carry forward net interest expense differences for ten tax periods. Exemptions exist for specific entities, like insurance providers and banks. Specific interest deduction rules apply to loans related to dividends, share capital, or family-owned business acquisitions. 

Furthermore, spending on business entertainment is also tax-deductible by up to 50%. Food, accommodation, transportation, and other incidental costs such as entry fees or equipment for entertainment will all fall under this category.

Business travel expenses are also fully deductible for tax purposes, unlike personal travel. Small business owners can optimize deductions by combining personal trips with business purposes. However, certain expenditures like donations, fines, dividends, and illegal payments are non-deductible under corporate tax laws.

3. Make the most of your tax credits. 

Yes, tax deductions and tax credits are different. Both help reduce your taxes, but in distinct ways. Deductions lower your taxable income by subtracting business expenses like rent and payroll, as previously stated. Credits, on the other hand, are applied directly to your tax bill after calculating your preliminary tax liability. But tax credits, like deductions, can significantly lower your taxes and often encourage beneficial business practices. 

Suppose you’re a foreign entrepreneur in the UAE, and your enterprise has branches or subsidiaries in various other countries. These foreign branches are often considered “permanent establishments (PEs)” and are taxed on profits in those countries. Under the UAE corporate tax regime, you can claim a “foreign tax credit” for taxes paid abroad against UAE taxes on foreign income. However, you cannot carry forward, backward, or receive a refund for your unused foreign tax credits.

4. Accelerate or defer your income. 

If your company uses cash-basis accounting and has lower profits this year but expects higher profits next year, accelerate cash collections before year-end and defer expenses until after the new year. This way, the current year’s income may be taxed at a lower rate, and next year’s deductions might be more valuable with a higher income. You can also carry forward your net operating losses from this year to offset future income and reduce taxes. 

Conversely, if this has been a profitable year, consider deferring some revenue to the next year and prepaying some expenses to increase this year’s deductions. This approach can help manage taxable income across different years.

5. Build a sustainable office space.

Today, most countries have tax incentives in place to encourage green building initiatives. For instance, the UAE government provides grants and easy access to green financing for companies embracing sustainable practices. If you build a sustainable workspace in Umm Al Quwain Free Trade Zone (UAQ FTZ), in particular, you can avail various tax benefits such as corporate tax exemption, customs duty exemption, and profit repatriation. Moreover, UAQ FTZ provides extensive support for business setup and guides investors through paperwork, licensing, and permits.

However, compliance with the UAE’s sustainability regulations is vital. Thus, we recommend you hire a tax advisor to stay updated on tax policies that may impact your business.