Special Corporate Tax Deductions That You Need to Know

Tax season is usually the least exciting time of the year for business owners, and filing corporate tax can bring headaches. But in most cases, business owners aren’t aware of all the special corporate tax deductions available only to them. 

Check this article to find out if you’re missing potential savings by not taking advantage of all these deductions! 

Dividends received deduction 

The dividends received deduction (DRD) is a federal tax deduction in the US that applies to certain corporations that get dividends from related entities. 

Similar to individuals, corporations must pay tax on the dividends they receive from other corporations, but usually at a higher tax rate. Without a special corporate tax deductions rule, the tax rate on dividends received is often damaging to corporations because they are taxed at three or more taxation levels.

In particular, a corporation pays the first taxation level on its income before distributing its after-tax income to its shareholders. The second taxation level incurs when the shareholders pay their taxes on their dividends. The third taxation level is when the corporation distributes the after-tax income from the dividends to its shareholders. There are even more levels of tax depending on the business’s structure. 

Generally, a US corporation may deduct 50% to 100% of dividends received in calculating taxable income. Different tiers of possible deductions depend on how much ownership the company has in the dividend-paying company. 

Particularly, the deduction rate for tax years beginning after 2017 is 50% of dividends received when the ownership percentage is less than 20%. This rate increases to 65% when the ownership percentage is at least 20% but less than 80%. The DRD rate is 100% deductible when the ownership is 80% or more.

However, there are several rules that corporate shareholders must follow to qualify for a DRD, including: 

  • Corporations cannot deduct bonuses from a real estate investment trust (REIT) or capital gains from a managed investment company.
  • Dividends received from domestic companies have different deduction rules than dividends received from foreign corporations.
  • The DRD is only legalized if the corporation has held the stock for more than 45 days.

Organizational cost deduction

Another special deduction available only to corporations is organizational costs. Organizational costs are expenses for organizing a corporation or partnership, including but not limited to: 

  • Legal services
  • Accounting services
  • State fees for incorporation or filing fees for partnerships
  • Expenses for temporary directors and organizational meetings for corporations

Organizational expenses do not include those incurred to issue or sell stock shares or transfer assets to a corporation. Organizational expenses are also different from start-up expenses. Start-up expenses include business investigation costs (e.g., market surveys) and operating expenses, which are incurred before a business officially launches. 

If your business type is a corporation, you can deduct up to $5,000 of your organizational costs and amortize the remaining over 180 months. The $5,000 deducted for organizational costs must be reduced by the amount by which the costs exceed $50,000.

Only expenses incurred prior to the end of the tax year in which the corporation started its business are eligible for deductions. However, a corporation still can claim this deduction by capitalizing all organizational costs and deducting them when the company is liquidated or terminated.

The bottom line

Understanding your qualifying corporate tax deductions helps you lower your tax liabilities, save and invest money in other potential areas. If you’d like to explore more helpful tax knowledge and tax-prep tips, we encourage you to subscribe to the Shoeboxed blog

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What Is Revenue Expenditure and How It Differs From Capital Expenditure

Revenue expenditure is one of the most confusing concepts and usually gets mixed up with capital expenditure. The confusion between these two types of expenditures can lead to severe consequences for your taxes and decision-making as your accounting figures might change significantly. 

We’re here to help you avoid this situation from happening. 

Scroll down to understand what revenue expenditure is and learn the key differences between revenue expenditure and capital expenditure. 

Definition of revenue expenditure 

Revenue expenditures are short-term expenses incurred that are significant for generating revenue within the same accounting period. It also usually refers to costs associated with existing fixed assets, which are spent to merely maintain the assets in their working condition without adding any additional value. 

Typical examples of revenue expenditure are repair and regular maintenance costs. Those expenses are necessary to keep your machines or equipment operating well. At the same time, they don’t substantially improve or extend the assets’ useful life for future financial benefits.  

Types of revenue expenditure

There are two main categories of revenue expenditure: 

  • Expenses for maintaining revenue-generating assets (e.g., cleaning, repairs, and maintenance costs)
  • Expenses for running the day-to-day business (e.g., wages paid to factory workers, utility expenses, rent, and office supplies)

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Key differences between revenue expenditure and capital expenditure  

First of all, what is capital expenditure? 

Capital expenditure is the amount spent to acquire or considerably upgrade the capacity or capabilities of long-term assets like equipment, machines, or buildings.

The key difference between the two is time scale, whereby revenue expenditures simply keep the business going on a day-to-day basis while capital expenditures invest in the longer-term growth of the business.

To help you easily see the main differences between revenue expenditure and capital expenditure, we’ve created a table to summarize below: 

Revenue expenditureCapital expenditure
Operate day-to-day business Acquire long-term assets 
Maintain long-term assets in working condition—add no extra valuesImprove long-term assets—add extra value
Provide benefits only for the accounting period Provide benefits for more than an accounting period 

Want to read more about finance? 

If you’d like to explore more entrepreneurship stories, financial tips, or productivity tools, find more posts like this on the Shoeboxed blog.

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4 Most Used Budgeting Methods for Businesses

A budget is a crucial planning tool for every business. It estimates your future expenses, revenue, and profits. It helps you better control spending and identify situations where revenue may not be sufficient to cover expenditures. Moreover, a budget allows you to realize potential growth opportunities when you may have extra cash available to invest in new ventures.

This article will look into four different budgeting methods used widely among businesses and help you find the one that best suits your current situation and type of organization.

4 Types of budgeting methods: Which one is right for your business? 

Below are the most common types of budgeting methods that you may want to consider for your business.

Budgeting method #1: Incremental budgeting 

One of the most popular approaches is incremental budgeting. There’s no fixed formula for incremental budgeting – you simply change last year’s budget by an increment or percentage to obtain this year’s budget figure. 

This method focuses on small changes from the actual or budgeted results from the preceding period. It’s perfect when your primary cost-driving factors don’t regularly change. Without the need for complex calculations, incremental budgeting is the quickest of all budgeting methods. However, be aware that your company’s departments may overspend to avoid receiving a smaller budget the following fiscal year. It’s best to look into specific expenditures and spending habits to prevent any kinds of budgetary slack. 

Best for: Those who are limited on time but need a method that is  effective and reasonable. It’s also well-suited if you have an established business with predictable and consistent cash flow and financial activities. 

See also: How To Create a Business Budget with 7 Steps.

Budgeting method #2: Activity-based budgeting (ABB)

Activity-based budgeting (ABB) is a budgeting method in which every activity that incurs costs is tracked and analyzed to identify areas for improved cost-saving. After figuring out how to enhance cost-efficiency, a business will create a budget based on those findings. Companies typically employ this budgeting method to cut expenses, boost productivity, gain a competitive advantage, and improve overall operations efficiency. Rather than just using the past budgets to determine a new budget like the incremental budgeting method, the ABB system digs deeper into the company’s performance.

The ABB system gives you more control over the budgeting process. Since the budget uses relatively precise data for the projections, it helps managers align the budget with overall company goals much easier. Due to its complexity, the ABB method is more expensive and time-consuming to implement and maintain.

Best for: New companies without historical budgeting data should consider this method. The ABB method is also popular in major industries, like manufacturing, construction, and healthcare. Companies that are going under significant changes, such as new subsidiaries, large clients, business locations, or products, are likely to use the ABB technique as well.  

Budgeting method #3: Value proposition budgeting (VPB) 

Value proposition budgeting (VPB), or priority-based budgeting, is all about driving value. With this method, you go through every cost item to decide whether the value it brings justifies its cost. This allows your business to focus on true value drivers while avoiding wasteful spending. One of the main downsides of the VPB method is that value is not easy to determine as it depends on multiple factors like politics or economic trends. If there isn’t a clear understanding of value, business owners may make short-term decisions that negatively influence long-term goals. 

When preparing for the VPB method, businesses have to answer these essential questions:

  • Why are we spending this amount of money?
  • What value does it bring to our customers and stakeholders? 
  • Does the value outweigh the cost? 

Best for: This method best suits companies aiming to reduce unnecessary expenses and refocus on creating what customers want most. Many government entities also favor this budgeting method because it involves a lot of financial restructuring throughout the year, and VPB can help them identify which services are most valuable and most needed within the community.

See also: Are You Maximizing Your Business Budget?

Budgeting method #4: Zero-based budgeting (ZBB)

Zero-based budgeting (ZBB) is another common budgeting method. When applying the ZBB method, you assume that all department budgets are zero and must be rebuilt from scratch. In other words, past budgets’ numbers are not considered. Budget planners must justify every penny spent. The ZBB method is very strict, attempting to eliminate any expenses that do not contribute to the company’s profit. It’s difficult and time-consuming to carry out a zero-based budget, so many companies only use this approach on occasion.

Best for: This extreme budgeting method is very useful when a business has an urgent need to reduce cost, for example, a financial restructuring.  

The bottom line 

Employing a suitable budgeting method for your business is an effective way to save costs, increase productivity, and bring in more profits. 

By understanding the basics of commonly-used budgeting methods among businesses, you can gain a deeper insight into your own business’s situation to improve your financial performance. 

In order to determine your ideal budgeting method, it’s important that you have accurately recorded expenses. In order to do so, you need to have your receipts organized and stored safely.  

Shoeboxed can help you. 

Shoeboxed is a well-trusted tool to help businesses, freelancers, and DIY accountants store and organize their receipts. It is a software program that quickly and efficiently digitizes your receipts and documents. This app automatically extracts, verifies, and categorizes important data from your receipts, then stores them securely in the cloud. Most importantly, scanned documents from Shoeboxed are accepted by the IRS


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