Taxes: Part One

In the 21st Century, the number of different taxes that we are obliged to pay has
reached record levels which means as a society we are even less willing to pay
them.

As well as income tax we are exposed to many other taxes including corporation
tax, capital gains tax, consumption tax and property taxes. All of this can be too
much to handle for an SME so accountants are often used to try to minimize the tax
liability of a company.

Certain taxes are unavoidable though. As a registered business entity you will have
to pay a consumption tax, which would either be sales tax in the US or value added
tax in the rest of the world. Sales tax is levied against the consumer, which means
that the company has no liability other than the act of collecting the tax which is
calculated on the sale price of a product. This tax is held by the company until a
determined time when it is paid to the appropriate governmental department. As
there is no tax due from the production of the goods, sales tax does not affect the
profit of an organization, unlike VAT which is levied on both the consumer and the
producer.

Capital gains tax, which is basically a tax on the sale of a non-inventory asset that
has increased in value since purchase. The difference in value is then treated as a
taxable source of income and thus has tax levied against it. The rate of taxation
varies depending on the income tax bracket of the individual or corporation selling
the asset and whether it is a short or long-term gain. Short term gains are anything
up to one year. As any accountant dealing with capital gains tax knows, it is
advisable to wait for over 12 months after the point of purchase before selling the
asset so that long-term capital gains tax is due at a lower rate. Tax due on both short
and long-term gains can be deferred by a variety of methods.

Corporation tax is the taxation method for taxing the income of a business entity
classified as a corporation; the tax rate is dependent on the taxable earnings of that
corporation. As with income tax, the tax due may be reduced with the aid of tax
credits.

Tax credits are offered to businesses for a variety of reasons with the most common
of these being, encouragement to invest in alternative energies, encouragement to
employ certain individuals, disaster relief or on earnings outside the US. These
credits are then offset against the tax liability reducing the tax due.

Even individuals are confronted by an often confusing array of taxes. The most
common of these taxes is income tax, which taxes our earnings. People are often
unaware how much income tax they pay as it is dealt with by the employer who,
while calculating the wages for an employee also calculates the income tax due and
deducts this from the pay packet.

The PAYE system in England is the system of paying wages and appropriate taxes
and insurances on the cost of employees. This system allows employers to withhold
any deductions due on an employee’s salary, while calculating the correct payments
for statutory sick and maternity pay.

Tax affects everyone from an employee to the CEO of the largest corporation but if
you are in the position where you employee a good accountant, you can actually
lower your liability by exploiting loopholes in the anti-avoidance legislation.

A common method of avoiding income tax is for an employee in the higher tax
bracket to channel their wages through a shell company, thus changing the type of
taxation from income to corporation. Then drawing the maximum salary whilst
remaining on the lower tax bracket, after a certain number of years the shell
company is then liquidated.

Accountants can also advise on the best type of investments so as to receive tax
credits from the government.

There is an old expression: “Only two things in life are certain, death and taxes.”
Well, we can’t do anything about the former, but a good accountant can help with the
latter.
Taxes – Part 2
Welcome, to Tax It - Today we will examine the different types of tax which are in
effecttoday. There are many kinds of tax, each with a different mechanism of when
and how the tax is due. In business, it is vital to understand when and how each of
these taxes are calculated.

Let's start with sales tax. In the US, this tax is often is often used as a method for
states to generate revenue. Purchases at the retail level (not wholesale) are
subject to sales tax, which is a percentage of the sales price. Sales tax is not
standardized, as individual states can set the applicable rates - these rates
generally vary depending on the product. Sales tax is an indirect tax, as the taxes
are collected by the merchant who then, at the appropriate time pays the tax to the
appropriate organ. Sales tax, is also referred to as consumption tax.

Moving on to capital gains tax. Capital gains tax, is the tax which is levied against
any profits from the sale of an asset which was sold for more than it was bought.
This could be, for example, profit made when selling your house, a car, or any
stocks. This is a per annum tax which means that loss from a sale later in the year
can be offset against the profit from an earlier sale. The great thing about this tax is
it only taxes people with enough excess income to actually invest. In other words, it's
a tax the poor don't have to think about.

Like most taxes, property tax is self-explanatory. It's a tax based on the value of an
asset. The most common occurrence of this is tax on your home, but it could also
include your car and anything else the government wishes to tax. Interestingly, the
focus of property tax is on private assets in public view, such as your home or car.
But if you lend a work of art to a museum it can now be subject to the property tax,
as this piece of art in now in the public eye. Similar to the capital gains tax, property
tax generally generates revenue from people who earn enough to have assets worth
taxing.

Income tax, needs no introduction. Everyone of us is aware of this tax and aware of
how much it costs. It taxes the financial income of individuals and companies alike.
Most countries operate a bracketed income tax system, so a person making
$25,000 a year will pay a lower percentage of their income than someone making
$80,000 a year. People are taxed on gross income, while companies generally are
taxed on net income.

Value Added Tax is another consumption tax, similar to sales tax in the US but with a
key difference. It's more complicated as it's applicable at every point in the supply
chain. Generally, each step in the chain of a product being converted from raw
materials to something worth buying, has value added to it. So in the gas industry
you might have 3 steps. The first group pumps oil and sells it to the refiner - tax. The
refiner converts the oil to gasoline and sells it to gas station - tax. You pump the gas
and pay the station - tax. This system is also considered the most fair, since
everyone gets taxed based on the contribution they make to the economy.