also in terms of credit ratings, credit-worthiness, and future opportunities to obtain loans when your business hits dire straits. The very purpose that you sought a business loan can be the same reason that you may need to seek another loan to cover business costs and the initial loan amount not available due to taxation.
Tax policies must be put into consideration when planning in the mode of business financing, since tax policies influences the capital structure decisions taken by the company. For instance the percentage of money generated from back of profits or the release of certain class of securities. Tax considerations in regard to business credit are subject to various restrictions and regulations by the Internal Revenue Service (
Business credits if well planned can bring significant tax benefits to the firm. The principal and interest paid on the credit facility are classified as business expenses, and thus are deductible from the taxable income. In order to qualify for a tax deduction, the firm should be able to ascertain the amount of credit taken, and the assets and expenses financed must have been acquired for use in the business’s operation.
Majority of the business credits are not regarded as a source of business income. For instance when a firm negotiates with a lender or creditor to reduce its debt or write off the loan, the firm will accrue taxes on the amount forgiven or written off. In case where a business issues credit and the debtor defaults the loan, the firm can claim tax deductions on the amounts forgiven or written off against the taxable amount. However if the amounts are recovered later in the future, the firm has to recognize the amounts in preceding taxing period.
In cases where the firm’s core business is financial facilitation or intermediation to other firms, its annual income is subjected to taxation with less all the deductible expenses. And any interest earned on the loans and advances to its customers and clients are subjected to taxation. Where the business charge interest on overdue accounts but this is not its care business, it can claim income deductions on its total revenue.
Business credit as a form of financing reduces the net amount subjected to tax from the business income because interest charged on business credit is tax deductible and therefore. Unlike in equity financing, where the tax is calculated before the dividends and bonuses are paid off. Business credit can either be accountable or unaccountable. Utilization of business credit as a mode of financing implies that the company’s depreciation policies influence the method of business financing to a limit that has not completely been appreciated.
For a business that buys and sells goods and services on credit that are chargeable sales tax, taxation can be used to finance its operations. When a business buys goods on credit from another supplier, sales tax is declared after a certain period and the goods had been paid sales tax by the seller so the credit extension benefits the firm and vice versa. Specific provision for bad and doubtful debts is an expense, which is tax deductible on the firm’s taxable amount, and the firm does not pay tax on such expenses.
A business should use cash or accrual based accounting method in presenting its financial statements. This helps in accounting for any business credit accruing at the end of the fiscal year and thus ascertains the tax returns accurately. A business should choose a fiscal year that concedes with its business cycle. However much in a debt, the Internal Revenue system requires that the business use a calendar year.
Remember, all businesses owners must consider taxation as part of the business structure and in regard to business credit. By ignoring taxation, a business can easily sink if not prepared.