Edmonton Tax Accountant | Using The Small Business Tax Rate To Decrease Debt
A simple way that business owners can maximize the money in their business and minimize the taxes that they are paying says Edmonton tax accountant, is simply by incorporating their business. Incorporating the business is so important, because that allows business owners to start taking advantage of the small business tax rates. Business owners who are not incorporated cannot use the small business tax rates and are taxed at the personal tax rate. Currently the personal tax rate is the highest marginalized tax rate and is currently sitting in Alberta at 48%. It has recently gone up from 39%, showing business owners that there is really no slowing down this tax rate. In order to maximize the money they have in their business, they must minimize their taxes. By incorporating, business owners can immediately start taking advantage of the small business tax rate, which is currently at 11%.
One of the most important ways that business owners can use this much lower tax is by helping themselves eliminate their debt. By paying a lower tax rate, business owners are able to put more money towards debt reduction. Whether the debt they are paying off is personal debt, debt incurred in getting their professional designation, debt they incurred through purchasing their businesses, or financing assets, business owners can pay that debt much sooner by paying a lower tax rate. For example, if the business owner is paying thousand dollars towards debt servicing each month, at the 48% personal tax rate says Edmonton tax accountant, a business owner would only be paying $520 a month towards the principal of the debt. On the other hand, once a business owner incorporates inserts paying the 11% small business tax rate, the same thousand dollars they put towards debt servicing, means that $890 goes towards debt servicing and they can pay off that debt much quicker. This will be able to allow them to put more towards wealth accumulation, or saving more money for assets once they have completely paid off their debt.
Edmontons tax accountant says in addition to decreasing debts, this can help business owners minimize taxes by spreading out the income they bring into their business from higher income years. If the business owner had a extremely profitable year, they you would want to plan with their accountant how to bring money into their business in order to avoid paying high taxes. If the business is not incorporated, they have no choice, but to have to pay higher taxes on the increase profits in their business.
In addition to being able to save money, reduce debt, accumulate wealth, and pay lower taxes, there are also secondary benefits associated with incorporating the business says Edmonton tax accountant. Businesses that are incorporated takes the personal liability off of the business owner and puts it onto the corporation. This means that business owners are less personally liable in their business and less likely to get sued. Incorporating also protects their tradename and gives their business a certain amount of legitimacy.
The average Canadian pays 43% of their income in taxes according to the Fraser Institute, and Edmontons tax accountant says 37% of the remaining income goes towards basic necessities such as clothing and food and shelter. Business owners who are not incorporated are paying too much tax, like the average Canadian. And often business owners who are incorporated, are not using the corporate structure to their benefit. Business owners can drastically impact their business not only by incorporating their company, but then using the corporate structure in order to minimize tax.
One of the most significant ways that business owners can use small business taxes lower tax rate of 11% is by helping them decrease their own debt says Edmonton tax accountant. How that works, is that by being lower taxes, entrepreneurs are able to eliminate their debt quicker. For example, business owners who are not incorporated and are putting thousand dollars toward debt servicing each month, and end up paying for $480 of that in taxes. However, Edmontons tax accountant says if business owners incorporate, when they bullet thousand dollars of their money towards their debt, their only paying $110 in taxes, meaning there paying $890 towards their debt itís easy for anyone to see, how much easier it is for business owners to pay off their debt much quicker this way.
Edmontons tax accountant says by utilizing this method, business owners can put more towards their investment portfolio every month and every year, significantly accelerating how much wealth they can accumulate for several years. Also can allow business owners to put more money towards savings in order to purchase assets. This is extremely important for business owners to know, especially because as a business ages, it is less likely to qualify for loans.
In addition to reducing debt, increasing wealth, and saving money, by incorporating, business owners can eliminate paying for CPP on top of tax. Since the employer must pay the employee portion of CPP as well as employer portion of CPP, thatís roughly 10% per year in taxes that business owners can eliminate immediately by incorporating. Edmonton tax accountant says this can add up significantly.
Another way that incorporating can significantly impact the business, is by being able to effectively tax plan with their accounting team. If a business had a huge profitable year, they will be able to choose how to bring money into the business slowly and over a certain period of time in order to minimize taxes. If the business owner is not incorporated, and they make a significant amount of money one year, they have no choice but to take a huge tax hit. Edmonton tax accountant says this is why itís extremely important for business owners to incorporate, so that they can effectively plan taxes with their accountant and for their minimize the taxes they pay.