Tax Reduction Approaches Employed by Organizations (Essay Sample)

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Tax Reduction Approaches Employed by Organizations
Profitable companies contribute considerably to the annual tax revenues and, by extension, the gross domestic product (GDP). While paying levies is widely considered a dutiful act, corporations have always construed taxes as a liability. This perception is chiefly based on the ultimate financial impact of levies—They reduce a company’s earnings. Since tax evasion is unlawful, entities usually seek acceptable approaches to reduce their tax liabilities. Also, governments across the globe have initiated models to encourage tax compliance. In the US, the Internal Revenue Service (IRS) is the country’s principal taxing authority mandated to implement federal tax laws. Some of these regulations include provisions that create reasonable opportunities for businesses to lessen their tax burden. Organizations reduce their tax obligation by increasing deductions and claiming available tax credits.
Fundamentally, corporations reduce their tax burdens by increasing the allowable deductions, which minimizes their taxable income. This approach entails snowballing the total allowable expenses, such as charitable contributions (Duquette 560). Tax legislations have laid down items that can be deducted from the net revenue income to obtain the income to which the tax is imposed. Another way of increasing deductions is accelerated depreciation, grounded on tax-advantaged laws (Koester et al. 3290). Companies have the discretion of expensing the cost of their assets faster than the expected rate of wear and tear. Notably, accelerated depreciation allows organizations to defer levies for an indefinite period. Thus, the approach helps entities increase their investments and generate more returns by ensuring steady returns.
In addition to increasing allowable deductions, businesses also seek tax credits provided under various tax laws to curtail their tax burden. This strategy is most effective when a company cannot justify increasing its expenses. Generally, domestic-only corporations with a highly intangible asset base are more suited for tax credits (Lampenius et al. 2). Regulations that stipulate tax credits primarily target companies that cannot access tax-rate avoidance. Usually, these corporations cannot relocate their businesses to other countries with significantly more advantageous tax laws. Avoiding taxes by claiming tax credits is typically juxtaposed to tax-rate avoidance, which “is associated with more tax uncertainty, suggesting a higher complexity of tax rate avoidance strategies” (Lampenius et al. 36). Therefore, businesses qualifying for tax credits have a better chance of reducing their tax burdens more effectively and efficiently.
In essence, the major strategies employed by corporations to reduce their tax liability are increasing deductions and seeking tax-rate avoidance th