7 tax saving tips for small businesses
Photo: Stevepb / Wikimedia.
So you opened or started your own small business. First of all, congratulations on the start. As a business owner or new to the business field, you have undoubtedly studied and learned a lot about running a business and you still have a lot to learn.
One of the trickiest things you will ever have to learn is how to handle the taxes on your new business. The US tax code, over 70,000 pages long, for example, is not easy to read.
With the annual tax season on the horizon, you may be spending or saving a lot of money depending on how your business files taxes.
Here are some essential tax saving tips that will help you avoid paying too much tax as a new business owner. Use the tips to save more on your taxes.
1. Consider hiring a business tax services company
One of the biggest mistakes small business owners make in their first year is thinking they can handle taxes on their own.
But, according to National Biz, more than half (62%) of entrepreneurs think accountants can cut taxes, and you should be a part of that statistic.
Here are some reasons why you should consider hiring a business tax services company:
Tax calculations are complex
There are many factors that complicate the tax process. For example, there are specific rules if your business generates income outside of your state.
State-by-state regulations can also make it difficult to determine which tax regulations apply to your business, especially if you have employees.
The best way to make sure your taxes are filed on time and properly filed is to work with a tax professional.
A tax company can save your time and money
A survey by the National Small Business Association found that the average time it takes small business owners to prepare their taxes each year is over 80 hours. These are hours that you could actively save by working with a tax professional.
All you need to do is notify a tax expert and check their results for accuracy later. You can then channel the recorded time onto other beneficial business activities.
Tax professionals know all the deductions you are potentially entitled to and will advise you whether you should opt for standard deductions or itemize for optimal savings. They’ll sort out the details, save enough to pay for their services, and put an extra coin in your pocket.
Plus, even semantic errors and math errors could cost you dearly, not to mention that the IRS imposes fines or lawsuits on companies that make seemingly non-accidental mistakes.
2. Maximize pension plans
The government recognizes many forms of retirement plans to adapt to different types of situations. As a small business owner, you may prefer to use IRA-based plans rather than defined contribution plans. These regimes are:
- Traditional payroll deduction
- SIMPLE IRA plan
Each has its pros and cons, so the decision is up to you, your employees, and your financial advisor. The choice can be influenced by factors such as the number and average age of employees.
So, how do you take advantage of retirement plans to save on taxable income?
- First, the goal is to use a plan that will shift the savings costs onto the employees in order to reduce your burden as an employer.
- Employees should contribute to their plan through direct payroll deductions.
- Consider whatever is required by law to save the business money on franchises. In addition, you could potentially be eligible for a tax credit.
- If you are self-employed with no formal employees, consider a 401 (k) solo or a SEP-IRA.
- Catch-up contributions are available for workers over 50, providing additional tax relief. Make sure you don’t run into it if you have older employees.
3. Year-end planning tactics
Saving using this strategy is all about perfect timing and ideally “spending the money” to qualify for certain deductions.
Consider these year-end tax planning tips when developing your tax strategy.
- Start an Accounts Receivable Age Report to detail the customers who owe your business, so that you deduct bad debts from your income. Only use this tactic if you are sure they won’t come back, but you will need to reverse this ratio to avoid fines upon discovery in case they do.
- If you assess that you might be in a lower tax bracket in the coming year, consider deferring some of your income to be taxed in the current year.
- Always file your taxes on time to avoid late penalties
- Donating to public charities opens the doors to the CARES Act, whereby you can deduct up to 60% of adjusted gross income. There is an exciting twist where you can donate appreciating stocks and claim increased market value deductions.
- Consider giving your employees a gift or hosting a year-end party, as these incentives are eligible for deductions
4. Deduct your home office tax break
The influence of Covid-19 on working from home could last long after its demise. If you plan to operate your business from home, you can reduce your taxable income by designating space exclusively for an office.
Are you eligible for the home office deduction?
The IRS allows all kinds of housing, including a rented apartment or even a boathouse. The catch is that the actual space should be used exclusively for business purposes, even if it is a garage. This should be your primary business location where you perform administrative roles.
However, there are two exceptions:
- Licensed home daycare for people over 65, children and people with disabilities.
- Eligible if you use the space as a warehouse for your merchandise
Calculating your potential deductions
There are two ways to get your home office deduction:
- The simplified option uses the measurements of your office space, calculating it with a predefined rate. Currently the rate is $ 5 per square foot, with an upper limit of 300 square feet.
- The other method is more complicated because it focuses on calculating expenses. With this option, you can deduct maintenance and repair costs, insurance costs, mortgage interest, to name a few.
With this method, you need to keep all receipts and itemized details of any business activities you plan to use to claim deductions in order to pass the IRS audit if ever they reach you.
5. Travel and business transportation costs
The IRS allows deductions on business-related vehicle transportation costs. Your business has two options for determining how much to deduct.
- Keep complete records of all costs related to company transportation expenses
- Take advantage of the preset IRS mileage rate
If your business involves a lot of transport, probably for deliveries, it is advisable to go with the first option.
The IRS uses a concept called a “tax household” to determine which trips are deductible. Your tax home is your business premises but can also be your residence if you work on several sites; All is relative.
As a small business owner, you probably use the same vehicle for travel and business purposes, but only the business part is deductible, although there is some incidental personal time (for example, if you have traveled to Chicago on business and spent an evening with a relative).
Here are some other notes to help you optimize travel deductions:
- Consider the per diem (per day), especially if the business is located in large cities.
- Familiarize yourself with the rules of international travel to maximize deductions
- Not all hotel bills are deductible, reducing costs like access to the gym can help you keep your deduction compliant.
- You can deduct the costs of accompanying your spouse if he is an employee
- Meal expenses are deductible up to 50%
6. Keep track of your spending
The IRS is very critical of detailed documentation, which improves transparency. Suppose you want to take every little opportunity to reduce your taxable income and take advantage of all kinds of possible deductions.
In this case, your files should reflect the same thing and they should be accurate. Tracking is one way to make sure nothing gets lost throughout the year. While manual saving is an option, it is outdated and prone to errors, duplicates, and miscalculations.
Online accounting software and applications solve all the problems by keeping accurate records of all expenses on a single interface, including built-in credit card expenses.
7. Restructure your business
Many business owners don’t think restructuring is essential for saving taxes, according to Inc. Magazine. However, reinventing your business can bring an array of additional tax savings opportunities. The most direct benefit is that your first $ 50,000 will be taxed at 15% instead of the possible 35% when you switch from an S corporation to a C corporation.
Also consider restructuring the way you reward employees. It is acceptable to increase their wages, but the increase would be imposed and reduced, leaving them only a small fraction. On the other hand, adding the same to employee benefits will work for both the worker and the business.
Let’s say you give an employee $ 300 more for medical insurance, the lot that would not be deducted by income tax, FCIA and Medicare; it is therefore a win-win for both parties.
Be smart about your business taxes
There are many factors and IRS rules that govern the tax process. While many large business establishments have mastered the art of saving on taxes, small businesses tend to take the time to learn the tips and tricks.
Often, SMEs end up making inefficient tax returns that cost them money. From hiring professional tax experts to maximizing deductions, the above ways are a great place to start to make sure you save more money on taxes.
Remember that one of the main reasons small businesses do not benefit from attractive deductions is the inability to keep up with reforms. The IRS, legislation, and other legislative bodies regularly issue tax updates throughout the year, and you should try to keep pace.