Why Is Studying Taxation Laws Essential in The Business World?

We are living in an evolving world, where trends come and go like a breeze. Marketers are putting every effort to keep up with changing algorithms, while entrepreneurs are fulfilling legal obligations. In addition to registering your company and acquiring patents, you have to share your profits with the government and investors. Giving out dividends to shareholders makes sense as they are the company’s owners, but why government charges tax?

Every state needs sustainable funding sources to make public investments – health, infrastructure, defense, etc. And taxes pay for public goods and services while maintaining a social contract between the citizens and the government. In addition to taxing individual incomes, every company has to pay a corporate tax. Therefore, businesses have to implement an effective tax strategy that collects and files taxes adequately.

At the same time, businesses must develop a thorough understanding of taxation laws to take advantage of tax credits and deductions. These smart techniques can help in reducing tax liability while improving business profitability. If you are skeptical about it, have a look below. Here are five reasons why studying taxation laws is essential in the business world.

1.    Determines Tax Obligations

Every company is subject to state and local taxes that vary from state to state. Therefore, you have to check up with your local and federal government to understand your tax obligations. They would hand over income brackets with a fixed tax rate, but do you know how to charge it in your financial statements? Instead of hiring a taxation lawyer, learn the ropes yourself. You don’t have to pursue a specialized tax degree; instead, an online MBA accounting can also teach you the tips and tricks. You will learn about taxation and compliance, helping you fulfill businesses’ tax obligations.

Moreover, understand your business structure. As a sole trader, you are liable to pay personal and business tax. In comparison, corporate owners have to pay business and employer tax while collecting sales tax from customers. Likewise, if you are importing raw materials, furniture, you have to cough up money on excise tax. Remember, every tax has special rules and different filing protocols.

2.    Familiarizes with Tax Filing Procedures

In addition to tax obligations, it is essential to apprehend the filing procedures. Every company has to file their respective taxes to the government at both – federal and state levels. Firstly, calculate the taxes. You can either use a software or manually deduct the overall tax payment from your annual profit. Similarly, for employee taxes, calculate the withholding tax after making all health and social security deductions.

Do you know when taxes are due? After calculating the tax payments, every business is eager to file them. Unsurprisingly, you have to wait for the ‘Tax Day,’ i.e., April 15. However, if your year ends in March or you are at the risk of missing the tax deadline, feel free to request an extension. You have to give a relevant reason, and the authorities will push the deadline after six months to October 15.

3.    Unfolds Tax Deductions

Although the corporate tax rate is 21%, it seems a lot when turned into numbers. Fortunately, corporations have permission to reduce taxable income through legal means and methods. If you notice, expenses and purchases are two things that reduce profits. So, why not use business expenditures as tax deductibles? You can deduct employee salaries, health benefits, donations, travel expenses, or insurance premiums.

Furthermore, if you have non-current assets, include depreciation as an expense. It is a non-cash expense, but it can significantly reduce business income. Besides this, all investments and real-estate property that a business owns to generate income are tax-deductible. Nevertheless, don’t miscalculate any expense to reduce profits because every company is subject to an annual audit.

4.    Updates with Tax Cuts & Job Act Changes

Even in this digitalized world, there is a lot of confusion regarding tax calculation and payments. Three years ago, the Tax Cut and Jobs Act (TCJA) became part of the law. It is the reason why corporate tax went from 35% to 21%. Since this law has a strong influence on businesses, it is essential to stay up-to-date with it. In the coming years, the adjustment for amortization and depreciation will no longer be a part of tax limitations. Similarly, it will treat the research and development costs as an asset, making it subject to amortization. Thus, increasing deductibles and letting companies scale down their taxable income.

5.    Develops Understanding of Tax Refunds

At times, corporations over and underpay tax than their actual tax liability. And no one acknowledges this until companies file a tax return. It provides information about income receipts, invoices, and other things that impact tax liabilities. Similarly, it will help you claim a refundable tax credit and the refund for the withheld income tax. You can fill-up the form given by the internal revenue service (IRS) or other relevant authority.

If you are running a company with partners, use Form 1120 to file annual returns. Otherwise, if you have a public or private limited organization, use Form 1065. Moreover, report your non-employment-related income through Form 1099. After reporting income, deductions, and tax credits, authorities identify the amount of income the taxpayer or the government owes.

Final Thoughts

Today, the business world is quite complicated. Entrepreneurs are trying to keep up with emerging technological trends while completing legal obligations. After all, the tax laws and regulations are also changing with time. And a small mistake regarding tax filing and calculation can put the entire company under hefty penalties. Therefore, learn how taxation laws work in the corporate world and make your business succeed.