Lowering your tax bill for your small business is always a goal; with the tips below, you can do just that. And don’t worry, all of the tax tips below are completely legal, it just will take some time between you and your CPA to make sure you are planning for everything correctly and strategically. Don’t overpay, unknowingly, on your tax obligations!
Tips On Tax Reduction for Businesses
1. Save Your Receipts
We all know how cumbersome and annoying saving every receipt for your business can be. But don’t get lazy! You could be throwing money away if you’re not properly recording a business expense you make.
Business expenses can qualify as business deductions when they are “ordinary and necessary.” And those deductions will help to lower your taxable income in your business, which means, paying less taxes! Some things that you would want to have receipts for include:
- Association dues/memberships
- Interest costs on business loans
- Business insurance on contents, machinery and equipment
- Office supplies used to provide your services or products
- Business-related vehicle expenses, including fuel, insurance, maintenance
- Travel expenses for earning business income
- Legal and accounting fees
If business is run out of your home, you are also allowed to deduct a portion of all related home expenses, as well, such as utilities, maintenance, and insurance.
2. Look into Tax Credits
Even better than business deductions are small business tax credits. It’s as close to free money as you will get. They are dollar-for-dollar reductions in your tax liability and offer the most bang for your buck when it comes to tax reduction for your business. Some things that may quality for tax credits in your business:
- Offer employees subsidized health insurance
- Offer employees retirement plans
- Potential state offered tax credits for economic growth and business investment
- Possibly use personal tax credits to reduce business income or tax liability (child tax credits, charitable contributions, retirement contributions and health care expenses)
Make sure to work with your accountant to ensure you’re taking every possible tax credit that could benefit your business.
3. Take the Qualified Business Income (QBI) deduction
The great thing about this business deduction is that it can trim eligible taxable income by 20% AND you don’t have to do anything special to qualify for it. You just need a pass-through business! It’s a great way to promote entrepreneurship for many individuals on the fence.
4. Carryover Losses
If your small business is new, you may have been operating at a loss for the first few years. But when your business starts to earn a profit, know that you can use prior business losses to lower your tax bill with the Net Operating Loss Deduction. Discuss this with your accountant to make sure you are utilizing this business deduction to the benefit of your business.
5. Set up Retirement Accounts
No matter what type of business you have (you’re working alone or you have a stable of employees) you can receive a tax benefit for contributing to or offering a retirement plan.
Solopreneurs can open a solo 401k, where contributions are tax-deductible up to a certain limit, but you will pay tax on the contributions upon withdrawal in retirement.
Business owners with employees can do the same by offering a traditional 401k to their employees. These can save your business on employer payroll taxes, because they lower the amount of employee wages subject to the Federal Unemployment Tax.
6. Review Your Business Structure
Small businesses generally do better as pass-through entities, where you and your business are considered one taxpayer. If you have a large business, you will more than likely be looking at a C Corp structure, but you will want to consult a tax professional to ensure you have your business set up as the right type.
7. Be Strategic With Invoicing and Purchases
You may want to wait until next year to send invoices to customers for this year’s billing. Do this to defer taxable income until next year, since you only pay tax on cash received during the year.
You can also look over equipment you need to purchase. You have choices about how to write-off the cost, but the decision must be made when the return is filed. In some years, it may be beneficial to acquire new and used assets to reduce your taxes, while other years, you may want to defer until the following year.
8. Depreciate Fixed Assets
It’s no secret that you can depreciate your fixed assets over their useful life instead of expensing them when purchases. But it can complicate things when it comes to taxes. The IRS offers depreciation methods, as well as a modified accelerated recovery cost system if you’d prefer to deduct the entire purchase in the first year. Discuss your options with a tax expert to see which strategy may work best for you.
9. Help Your Employees
Increasing employee wages can trigger higher employment taxes. But you can offset this by offering other fringe benefits that can possibly be tax-exempt, such as:
- Medical and dental insurance
- Long-term care insurance
- Disability insurance
- Group term life insurance
- Childcare assistance
- Tuition reimbursement
- Transportation
- Employee meals
- Student loan payments
All of these items are a great way to boost employee morale, attract top talent and grow your business.
10. Defer Taxable Income
If you use the cash-method for accounting in your business, you can take advantage of that by carefully managing your business’ taxable income, which in turn, will minimize your taxes. You can defer some of your income by following these strategies:
- Put recurring expenses on your credit card – you can deduct them in the current year, even though you won’t pay the credit card bill until next year
- Mail checks a few days before the end of the year – deduct expenses in the year you mail the checks. You may want to take advantage of registered mail so you can prove the mailing date
- Prepay expenses at the end of the year – You could possibly prepay office rent or prepay some of your insurance premiums
- Delay sending invoices until the last few days of the year – this way, you will receive payment in the new year and can report the income in the new year, as well.
At the end of the day, make sure you are working with a reputable accountant so you can take advantage of all possible business-related expenses. Contact us with any questions you may have.