5 Tax Saving Measures for Small and Medium-Sized Corporations That Seem Obvious But You'll Lose Out If You Don't Know Them

As the fiscal year-end approaches, many executives likely think, "It looks like we'll have more profit than expected this term. Is there anything we can do?" However, when you say tax saving, there are many cases where questionable methods or high-risk insurance products are recommended. In this article, we will carefully select and introduce five legal and practically used tax-saving measures for corporations that we can confidently recommend as tax accountants.

What is Tax Saving in the First Place?

Tax saving is the legal reduction of tax burden within the scope permitted by tax law. It is clearly different from "tax avoidance," which exploits loopholes in the law, and illegal "tax evasion." The five measures introduced here are all straightforward strategies with clear grounds in the National Tax Agency and Corporate Tax Law.

Measure 1: Utilize the Credit Guarantee Corporation (SME Business Insolvency Prevention Mutual Aid)

This is a mutual aid system to prepare for the risk of business partner insolvency, but it is also very popular as a tax-saving measure.

• Can be freely set from ¥5,000 to ¥200,000 per month (in ¥5,000 increments)
• Can accumulate up to ¥8 million in total
• Contributions are fully deductible as expenses

Unlike the Small Business Mutual Aid Program, this is not a "use it and lose it" system. If you pay for 40 months or more, the full contribution will be returned upon cancellation (however, the amount received upon cancellation is taxed as income, so design the exit strategy, such as canceling in a term with low profits).

Note: Due to the revision in October 2024, contributions made when rejoining within two years of cancellation are no longer deductible as expenses. This does not apply if you are joining for the first time.

Measure 2: Increase the actual take-home pay of executives and employees through a company housing system

This is a system where the company rents company housing and lends it to executives and employees. It's a win-win measure that allows the company to deduct rent expenses while also reducing the individual's tax burden and social insurance premiums.

The rent equivalent amount (the minimum amount to be collected so as not to be taxed as salary) is calculated by one of the following methods:

Target	Minimum collection line
Executives	The higher of the rent equivalent amount or 50% of the rent
Employees	50% or more of the rent equivalent amount

The key points for implementation are the following three:

• The contract must be made in the name of the corporation (individual contracts are not recognized as company housing).
• Calculate the rent equivalent amount and clearly stipulate the collection rules in the work rules, etc.
• Be careful, as the difference will be taxed as salary if the collected amount is insufficient.

Measure ③: Accrue expenses in advance using the special provision for short-term prepaid expenses

This is a special provision based on Corporate Tax Basic Notice 2-2-14, which allows expenses for services to be received within one year to be expensed in the period of payment.

For example, by prepaying rent, insurance premiums, or server usage fees for a year, you can deduct expenses that would normally be allocated to subsequent periods as a lump sum expense in the current period.

• The services must be continuous, homogeneous, and of the same quantity based on the contract.
• Once adopted, the same accounting treatment must be applied consistently every period.
• Expenses that should be matched with revenue, such as interest on borrowings, are not eligible.

A typical use case is to prepay next period's rent or insurance premiums at a time when it looks like the company will generate a profit in the current period.

Measure ④: Establish business trip expense regulations and pay non-taxable daily allowances

This is a system where, in addition to actual expense reimbursement, a "daily allowance" is paid based on established business trip expense regulations. If the requirements are met, it is a mutually beneficial measure where the company can deduct the full amount as an expense, and the receiving executives/employees are exempt from tax.

The criteria for recognition as non-taxable (Income Tax Basic Notice 9-3) are as follows:

• The amount must maintain an appropriate balance among all executives and employees.
• The amount must be considered socially reasonable when compared to other companies in the same industry and of similar size.

Setting excessively high daily allowances carries the risk of the expense being denied during a tax audit. When establishing regulations, carefully consider whether the amount is appropriate for the company's size and actual travel circumstances.

Measure ⑤: Record year-end bonuses as accrued expenses to reduce current period expenses

This measure allows for the reduction of corporate tax while rewarding employees in the form of bonuses when profits exceed expectations at the end of the fiscal period.

To deduct accrued bonuses as expenses in the current period, all of the following three requirements must be met:

• The amount to be paid must have been individually notified to each employee by the closing date.
• The notified amount must have been accounted for as an expense in the current period.
• The notified amounts must have been actually paid to all notified individuals within one month from the day after the closing date.

This is a standard year-end closing measure that achieves both employee rewards and tax savings without cash outflow from the company.

Summary: Tax savings depend on "knowing or not knowing"

Tax Saving Measures	Estimated Effect
Small and Medium Enterprise Credit Guarantee Corporation	Full deduction of premiums as expenses (up to a cumulative total of 8 million yen)
Company Housing System	Part of the rent is expensed by the company, increasing the take-home pay for executives and employees.
Special Provision for Short-Term Prepaid Expenses	Deduct one year's worth of expenses in advance in the current period
Business Trip Expense Regulations	Daily allowance is deductible and tax-exempt for the recipient.
Accrual of unpaid bonuses	Bonuses can be recognized as expenses for the current period.

Many tax-saving measures create a difference in cash flow and retained earnings simply based on whether you know about them, so please consider them carefully.

Our office supports business owners. If you are considering this but are having trouble with implementation, please feel free to contact us first. You can also view our services and fees.