Tax planning for small business owners can be a complex and difficult process, with numerous considerations such as regulatory changes, liability considerations and long-term growth goals to take into account.
However, small businesses can utilize several strategies to save on taxes – these include research and development deductions, bad debt deductions, and increasing retirement plan contributions.
1. Review Your Financial Situation Prior to Year-End
As year-end approaches, review your business’s financial situation to identify what steps need to be taken to reduce taxes owed. A good rule of thumb would be consulting with an expert tax services provider in order to develop tailored strategies suited specifically to your circumstances and business.
Lowering your adjusted gross income (AGI) is one way to lower taxable income and minimize tax liabilities. You can do this by taking advantage of deductions and credits available, such as increasing retirement plan contributions, taking an expense-deductible loss or depreciating assets. Another approach would be writing off uncollectible debts before year end by running an accounts receivable aging report and subtracting them from total sales figures. You could also take advantage of Work Opportunity Tax Credit (WOTC), which helps businesses attract and retain qualified workers.
2. Review Your Accounts Receivable Before Year-End
Conducting meticulous record keeping is one of the key ways that small business owners can take advantage of tax deductions and take full advantage of them. Without documentation, your taxes could be much higher. Software that automates receipt tracking and expense filing saves hours while eliminating missed opportunities to deduct your business’s income.
Reviewing accounts receivable before year-end is a necessary task if you use cash basis taxes; otherwise, an accountant will need to know exactly how much is owed from customers on your books prior to filing taxes.
Deferring taxable income until nearing the end of a tax year can be advantageous, if your taxes will likely increase. This strategy doesn’t try to dodge or avoid paying your taxes; rather, it just shifts them forward into next year.
3. Review Your Deductions
The IRS allows small business owners to claim deductions that reduce their taxable income and choose wisely among them to lower their tax liability. Selecting suitable deductions will help your small business save tax.
Structure can have an enormous effect on your taxes. Selecting a pass-through entity like an LLC can significantly lower taxes by enabling you to deduct startup costs and expenses more easily.
Accurate record-keeping and receipt tracking is crucial to optimizing your deductions. Consider investing in software that automatically records and stores receipts so they are easy to locate come tax season. Employee benefits like health insurance premiums, flexible spending accounts and HSAs may help save payroll taxes as well. Consider setting up tax-advantaged retirement plans.
4. Review Your Tax Bracket
Keep in mind that choosing the appropriate business structure can have a major effect on your tax liability. Some types of companies, like C-corps and partnerships, are subject to corporate income tax; other entities, like sole proprietorships and partnerships aren’t.
In the United States, taxpayers are subject to taxes at various tiered rates known as tax brackets. Currently, the IRS employs seven distinct brackets that increase in intensity as your income levels do.
To determine your tax bracket, the TurboTax Tax Bracket Calculator can help. This tool utilizes your filing status and income in order to estimate what federal taxes you owe this year. Deductions may also alter this calculation, decreasing how much income is subject to taxation.
5. Hire a Family Member
Small business owners may be tempted to employ family members in the operation of their businesses as a way of cutting costs; however, this strategy could prove disastrous should the IRS investigate and find that you are using them as an attempt at tax savings – leading them to issue penalties against your enterprise.
Adult family members must be compensated as employees, subject to all federal, FICA and FUTA taxes as if they were any other employee. Furthermore, they should receive a job description, time sheets and comply with other standard employment practices.
Hiring family members may not always be straightforward and it is wise to consult a tax expert before employing anyone from within your own family. Furthermore, providing them with benefits such as health insurance and retirement plans could have gift tax implications.