MBA in a Nutshell #23 - Accounting and Finance : Tax Reduction Considerations

With the three accounting statements out of the way, it is now time to look at legal forms of tax reduction.

a) Structure of the Organization

The structure of the business will have a strong influence on the taxes paid by the company.  If you incorporate a Private Limited Company in Singapore, corporate taxation is at 17% although generous tax exemption schemes exist. If you were to incorporate Limited Liability Partnership, income is treated as personal income for the business partners.

b) Timing of Purchases

You can game your company expenses to offset high taxes from a good year. This is often because revenues are recognized on an accrual basis, when the sale is paid and not when the bills were collected.

c) Write-off accounts receivable

It is a bitter reality that many companies do not pay up after buying  a product or service. These bad debts can be written off tactically to gain some tax benefits.

d) Depreciation, depletion and amortization

This often involves taken an asset and reducing it's value in the balance sheet annually. If you depreciate an asset more aggressively using a double declining depreciation method versus a straight line method, your expenses will go up short term and may reduce your taxation income accordingly.

In Singapore, depreciation of some asset like machinery may be governed by statutes so there may not be so much flexibility over this.

e) Inventory Valuation

Because we are subject to inflation, sometimes you can manipulate your profits by selection which batch of inventory are sole. If you use a last-in-first-out (LIFO) approach, you can be treated as selling your latest inventory. A first-in-first-out method (FIFO) would mean selling at a price marked for your oldest inventory. Somewhere in between is the weighted average approach.

Singapore is closely aligned to IFRS.  In IFRS, LIFO is not allowed under our accounting conventions because it understates profits and possibly causes inventory to be marked at obsolete values.

An understanding of what is possible in taxation should also govern the decision of whether a self-employed person like myself is better off incorporating a company.