Tax Benefit

Updated on January 17, 2024
Article byAbhijeet Sharma
Edited byAnkush Jain
Reviewed byDheeraj Vaidya, CFA, FRM

What is Tax Benefit?

Tax Benefits refer to the credit a business receives on its tax liability for complying with a norm proposed by the government. The benefit is either credited back to the business after paying its regular taxation amount, or it is deducted when paying the tax liability in the first place.

Tax-Benefit

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A business needs to plan the that will help it to reduce the tax burden, either in the form of exemptions or deductions according to the tax benefit principle. Smart planning and the use of specialized services where the internal management lacks the knowledge help utilize the best procedures available and better use the government’s provisions.

Tax Benefit Explained

A tax benefit refers to the advantages or savings a company gains from utilizing various tax provisions and deductions provided by tax regulations. These benefits play a crucial role in influencing financial decisions and strategies, impacting a company’s overall profitability and tax liability.

A business must pay taxes to the government on the income generated in the fiscal yearFiscal YearFiscal Year (FY) is referred to as a period lasting for twelve months and is used for budgeting, account keeping and all the other financial reporting for industries. Some of the most commonly used Fiscal Years by businesses all over the world are: 1st January to 31st December, 1st April to 31st March, 1st July to 30th June and 1st October to 30th Septemberread more. The rate of taxes varies depending on the country and industry in which the business is being done. A business can use specific provisions of the country’s tax legislation to reduce the said tax payment to the government.

Tax benefits can manifest in several forms, including deductions for business expenses, credits for specific activities or investments, and allowances for the depreciation of assets. By leveraging these provisions, businesses can effectively reduce their taxable income, leading to lower tax liabilities and increased cash flow.

Utilizing the income tax benefit and other such benefits is essential to make the funds available for the best utilization. The amount of tax saved can be used for further business expansion. It is to be noticed here that the tax-saving has to abide by the terms mentioned in the tax legislation; otherwise, it might lead to evasion of tax which has legal implications.

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Forms

The tax benefit calculator can be applied to different forms of such benefits. Let us understand each of them in detail through the explanation below.

#1 – Tax Exemption

In this scenario, the entire income earned will be non-taxable. It happens because of the unique condition through which the income is earned. For example, to uplift the economic condition of a particular under-developed city, the government may exempt the income from taxation for three years if any business works out from there. In that scenario, if the business earns a total income of $40,000, the entire amount will be exempt from taxation, and the tax payable will be nil.

#2 – Tax Deduction

Here, a portion of the income will be reduced when calculating the income amenable to taxation. It could be because of certain special expenditures that the business might have done or certain capital assets that the business might have purchased, which the government intends to promote for greater use. For example, the firm’s total income might be $115,000, and there is a special tax deduction of 50% of the value if there’s a purchase of Govt. manufactured machinery licensed as environment-friendly. Let’s say the machinery cost, in this case, is $10,000. Now, the business will get a benefit of 50% of the amount expended on this machinery, which comes to $5000. Therefore, the total taxable income will be $115,000-$5000 = $110,000.

#3 – Tax Credit

In this case, there is no difference in the income that is being taxed. Instead, there is a rebateRebateA rebate is a cashback to the customers against the purchase as a completing transaction incentive. Rebates are offered after the sale. Thus, it is a form of marketing strategy provided to the client to facilitate future transactions.read more on the taxation that is paid. It might arise because of the previous tax credit or the fulfillment of other special provisions. For example, a business earns a total of $150,000, on which it is liable to pay tax at 20%. The tax payable amount will come to $30,000. Now, let’s say there was a pending taxation suit from the last year whose decision took place in the current year. Last year, an excess of taxation of $4,000 was paid. So, this year the business will get the credit. Hence, the actual taxation payable will come to $30,000 less $4000, equal to $26,000.

Examples

Now that we understand the theoretical knowledge of the tax benefit principle, let us apply this to the examples below to understand the practicality of the concept as well.

Example #1

Business XY is into the business of providing readymade garments for men. The gross revenue for the financial year 2019 totaled $1,500,000, whereas the total expenses accruedExpenses AccruedAn accrued expense is the expenses which is incurred by the company over one accounting period but not paid in the same accounting period. In the books of accounts it is recorded in a way that the expense account is debited and the accrued expense account is credited.read more to $650,000. The net revenueNet RevenueNet revenue refers to a company's sales realization acquired after deducting all the directly related selling expenses such as discount, return and other such costs from the gross sales revenue it generated.read more, therefore, is $850,000. The tax slab for all the businesses is at a flat 20%. However, the business also involves itself in social welfare activities. It built a community home worth $20,000 and gave donations to sick homes worth $35,000. Now, the government has given a tax deduction of 50% on donations and 75% on expenditures for the social community.

So, in this case, out of total revenue of $850,000, which should have been originally taxable, the business will benefit from the donations and the community homes it has built. The deduction on donations will be 50% of $35,000, which is $17,500, and the deduction on community housing is 75% of $20,000, which is $15,000.

Therefore, the income that will be taxed will be $850,000, less $17,500, less $15,000, which is equal to $817,500. A 20% charge on this amount would mean total taxation of $163,500. It is to be noted, though, that the expenditure on community homes and donations must fall under the approved list with the government. It is done so that the businesses may not come up with fraudulent organizations of their own to evade taxes.

Example #2

In January 2024, a bipartisan proposal was introduced with the aim of broadening the child tax credit and prolonging business tax deductions. The objective is to secure Congressional approval before the commencement of the tax season on January 29.

A gradual increase is proposed in the refundable portion of the child tax credit (CTC) for the years 2023, 2024, and 2025. Additionally, adjustments to the tax credit for inflation are proposed starting in 2024. Although work requirements would persist, the plan seeks to enhance benefits for low-income families by enabling those who don’t pay income taxes to receive a $1,800 refund of the $2,000 per child credit, as opposed to the current $1,600. This proposed amount is slated to escalate to $1,900 in 2024 and $2,000 in 2025.

Eligibility For Family Tax Benefit

While the eligibility criteria for family income tax benefits can vary, families need to understand specific program requirements and have information about any updates or changes to ensure accurate assessment and receipt of benefits to which they are entitled.

  • To be eligible for the Family Tax Benefit (FTB) in the USA, the primary requirement is having dependent children under the age of 18.
  • Generally, eligibility extends to U.S. citizens, nationals, or qualified resident aliens.
  • FTB often considers the family’s income, with specific thresholds to determine eligibility. Families with lower incomes are more likely to qualify.
  • Some components of FTB may have a work requirement, necessitating parents to meet certain employment criteria to receive the full benefit.
  • Certain benefits within FTB might be age-dependent, such as the Child Tax Credit, which may provide additional support for children under a certain age.

Health Insurance

Almost all countries promote the concept of providing health insurance either for oneself or employees. The amount expended on the premium for such health insurance is available as deductions in the calculation of taxable income. The amount that becomes eligible as a deduction could be an absolute number or an allowable percentage limit.

For example – The premium on health insurance of the employees may be allowable as deductions from taxable income to the maximum of $10,000 or 10% of the gross taxable income before such expenses, whichever is lower. So if the gross taxable amount is $90,000 and the expenses on medical insurance are $12,000, the amount that will be eligible for deduction will be a flat $10,000 or 10% of $90,000, which is $9,000. The latter will become the eligible amount because it is lower, so the final taxable income will be $90,000, less $9000, equal to $81,000.

Tax Benefit Married Vs Single

Let us understand the effect of being single or married on the parameters of the tax benefit calculator through the comparative points below.

Single

  • Single individuals have their tax brackets, which may result in higher tax rates compared to married couples filing jointly.
  • Single filers typically have a lower standard deduction compared to married couples filing jointly, potentially reducing the amount of income not subject to taxation.
  • Some tax credits, such as the Child and Dependent Care Credit or the Earned Income Tax Credit, may have different eligibility criteria and amounts for single individuals.
  • Single individuals are solely responsible for their tax liabilities without the ability to combine incomes or deductions with a spouse.

Married

  • Married couples filing jointly often enjoy lower tax rates and a higher standard deduction compared to individual filers.
  • Combining incomes can lead to a more favorable overall tax situation for married couples.
  • Certain tax credits may be more advantageous for married couples, such as the ability to claim the Child Tax Credit jointly.
  • Married couples filing jointly share responsibility for their tax liabilities, which can impact their overall financial planning and strategy.

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This article has been a guide to what is Tax Benefit. Here, we explain its forms, examples, relation with health insurance, and eligibility for family Tax Benefits. You may learn more about financing from the following articles –