Looking to save money and optimize your tax strategy? Beyond cashing in on credits and deductions, tax exemptions and holidays can help you do so. Not sure where to start? Our CPAs have assisted many businesses in tapping into tax exemptions they weren’t even aware they qualified for. In this article, we will arm you with the knowledge you need to optimize tax holidays and other cash-saving benefits.
Sales Tax Exemptions
Sales tax exemptions allow you to exclude specific transactions or products from sales tax, to reduce your overall tax liability. These exemptions often apply to transactions and products that are directly linked to the production of your goods or services.
The IRS states that to be deductible, business expenses must be both ordinary and necessary. Although the specifics can differ between states, sales tax exemptions generally fall into three main categories:
- Type of product or service. Items bought for resale are typically exempt in most states. Some states also exempt purchases that are essential for a customer’s survival. This doesn’t always apply to food or groceries, but may apply to low-cost clothing or essential medical devices too.
- How the purchase is used. Certain products that play an essential role in some key industries or benefit the community are exempt from sales tax. The conditions for these exemptions are determined by state regulations.
- Purchaser exemptions. Some buyers, such as non-profit organizations and charitable groups, may be exempt from paying sales taxes even if the state generally imposes the tax on sales.
Annual Tax Holidays
A tax holiday is a temporary tax break where certain taxes are reduced or eliminated to encourage consumer spending or business investment. It aims to stimulate economic activity as it encourages consumer spending and business investment during the tax holiday period. For consumers, a tax holiday provides a financial incentive to make purchases they might otherwise delay. For businesses, it can increase sales volume and attract new customers, ultimately driving overall economic growth.
Governments may also use tax holidays to achieve specific policy goals, such as promoting energy efficiency or ensuring communities are better prepared for natural disasters. This happens subliminally with tax holidays for energy-efficient or disaster-related products, for example.
While it may seem like a catch because, when it comes to taxes, the house always wins, tax holidays can put money back into the economy in the following ways:
- States generate higher revenues from other taxes, such as income, business, and non-exempt items.
- Improved relationships between taxpayers and tax authorities enhance compliance and overall tax collection.
- States that offer tax holidays attract consumers from neighboring states, increasing economic activity and overall tax revenues.
Common tax holidays
There are several types of tax holidays that different states subscribe to, which have benefits for both consumers and businesses. These include:
- Back-to-school tax holidays: These typically occur just before the school year begins, allowing consumers to purchase school supplies, clothing, and electronics without paying sales tax.
- Energy-efficient appliance tax holidays: These holidays promote purchasing energy-efficient appliances. This helps consumers save on immediate purchases and encourages long-term energy savings for the state.
- Disaster preparedness tax holidays: These holidays are designed to help consumers and businesses prepare for natural disasters by exempting items such as generators, batteries, and emergency supplies from sales tax. This ultimately equips the state with better community readiness.
Using these tax holidays as a strategic part of your marketing plan can help you attract new customers and increase sales volumes during these periods if your business operates in a state that supports holiday tax exemptions.
Note that tax holidays are implemented at the state level, and each state decides whether to offer them, what types of taxes to suspend, and what items are eligible.
Strategic Planning for Exemptions and Tax Holidays
To maximize the benefits and put more money back in your pocket, you need a clearly considered tax strategy. Get started with the following:
- Identify applicable sales tax exemptions. Each state has different rules regarding which transactions and products are exempt from sales tax. Understanding the specific sales tax laws and regulations in your state is key to maximizing the benefits.
- Understand eligibility criteria. Each tax holiday comes with specific eligibility criteria and requirements. Ensure your business meets these requirements to participate fully.
- Timing promotions and marketing efforts. Plan ahead to take advantage of increased consumer interest during these periods as part of your marketing plan.
- Partner with a CPA: Working with an experienced Fusion CPA can help you identify all possible exemptions and maximize your savings.
At Fusion, our CPAs can help you develop a tax strategy to boost your revenue while ensuring you meet your business goals. From helping you determine eligibility to ensuring accurate recordkeeping, we can help you avoid common tax mistakes.
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This blog article is not intended to be the rendering of legal, accounting, tax advice, or other professional services. We base articles on current or proposed tax rules at the time of writing and do not update older posts for tax rule changes. We expressly disclaim all liability regarding actions taken or not taken based on the contents of this blog as well as the use or interpretation of this information. Information provided on this website is not all-inclusive and such information should not be relied upon as being all-inclusive.