Photo: Stevepb / Wikimedia.
So, you’ve opened or launched your own small business. First of all, congratulations on getting started. As a business owner or newbie in the business space, you’ve undoubtedly studied and learned a lot about running a business and still have plenty more to learn.
One of the trickiest things you have to learn is how to handle the taxes for your new business. The US tax code, over 70,000 pages long, for example, is not an easy read.
With the annual tax season on the horizon, you stand to spend or save a lot of money based on how your business files its taxes.
Here are some essential tax-saving tips that’ll help you avoid overpaying your taxes as a new business owner. Use the tips to better save money on your taxes.
1. Consider Hiring a Business Tax Service Company
One of the biggest mistakes small business owners make during their first year is thinking they can handle taxes entirely on their own.
But, according to National Biz, more than half (62%) of entrepreneurs believe accountants are capable of bringing down their taxes, and you should be part of this statistic.
Some reasons you should consider hiring a business tax services company, include:
Tax calculations are complex
Many factors complicate the taxation process. For example, there are specific rules if your company accrues income from outside 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 ensure that your taxes are filed on-time, and filed correctly, is to work with a tax expert.
A Tax Company Can Save Your Time and money
A survey by the National Small Business Association found that the average time it took small business owners to prepare their taxes annually was over 80 hours. That’s hours you could actively save by working with a tax professional.
All you have to do is brief a tax expert and later check their results for accuracy. You can then channel the time saved to other beneficial business activities.
Tax experts know all the deductions that you potentially qualify for and will advise you if you should opt for standard deductions or itemize for optimal saving. They will work out the details, save enough to pay for their services, and put an extra coin in your pocket.
Additionally, even semantic mistakes and math errors could potentially cost you, not forgetting that IRS fines or prosecute businesses who make seemingly non-accidental errors.
2. Maximizing on Retirement Plans
The government recognizes many forms of retirement plans to fit different types of situations. As a small business owner, you may prefer to use IRA-based plans as opposed to defined contribution plans. These plans are:
- Traditional payroll deduction
- SIMPLE IRA plan
Each of these has its perks and setbacks, so the decision lies within you, your employees, and your financial advisor. The choice may be influenced by factors such as the number and average age of employees.
So, how do you leverage retirement plans to save on taxable income?
- Firstly, the goal is to use a plan that will transfer saving costs to employees to lessen your burden as the employer.
- The employees should contribute to their plan through direct-payroll deductions.
- Heed everything required by law to save the company money on the deductibles. Besides, you could potentially be eligible for a tax credit.
- If you are a self-employed person with no formal employees, consider a solo 401 (k) or a SEP-IRA.
- Catch-up contributions are available for workers over 50 years, and this provides an additional tax break. Make sure to not fall out on these if you have older employees.
3. Year-End Planning Tactics
Saving using this strategy is all about perfect timing and ideally ‘spending money’ to gain eligibility to certain deductions.
Consider these year-end tax planning tips when building your tax strategy.
- Engage an Accounts Receivable Aging Report to detail clients who owe your business, so you deduct the bad debt from your income. Be keen only to use this tactic if you are sure they won’t be coming back, but you will have to reverse this report to avoid fines upon discovery in the case they do.
- If you evaluate you could be in a lower tax bracket in the coming year, consider carrying over part of your income, so it is taxed in the current year.
- Always file your taxes in time to steer clear of late-file penalties
- Donating to public charity organizations opens 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 stock that is appreciating and claim deductions on the hiked market value.
- Consider gifting your employees or throwing an end year party as these incentives are eligible for deductions
4. Deducting Your Home Office Tax Relief
The influence of Covid-19 on working from home may last way after it is gone. If you plan to run your business from home, you can reduce taxable income by designating a space exclusively for an office.
Do you qualify for the home office deduction?
The IRS allows all sorts of homes, including a rented apartment or even a boathouse. The catch is that the actual space must be used exclusively for business, even if it is a garage. It has to be your primary business location where you execute administration roles.
However, there are two exceptions:
- Licensed home-based daycare facilities for seniors over 65 years, children, and persons living with a disability.
- Eligible if you use the space as warehouse storage for your merchandise
Calculating your potential deductions
There are two methods of coming up with your home-office deduction:
- The simplified option leverages the measurements of your office space, computing it with a pre-set rate. Currently, the rate stands at $5 per square foot, with an upper limit of 300 sq ft.
- The other method is more complicated as It focuses on computing expenditures. With this option, you can deduce maintenance and repairs, insurance costs, mortgage interest, to name a few.
With this method, you must keep all the receipts and in-depth details of all business activities you plan to use to claim deductions to pass IRS audit if they ever come to you.
5. Travel and Business Transport Cost
The IRS allows deductions on the costs of vehicle business-related transport. Your business has two options to determine how much should be deducted.
- Keep thorough records of every cost related to business transport expense
- Leverage the preset IRS mileage rate
If your business involves a lot of transport, probably for deliveries, it is advisable to go for the former option.
IRS uses a concept called ‘tax home’ to determine which trips are deductible. Your tax home is your business premises but could also be your residence if you work at multiple locations; it is all relative.
As a small business owner, you probably use the same vehicle for commuting and business purposes, but only the business part is deductible, though there is incidental personal time (for example, if you traveled to Chicago for business and spent an evening with a relative).
Here are other notes to help optimize travel deductions:
- Consider per diems (per day), especially if the business is in the bigger cities.
- Familiarize with rules for international travel to maximize deductions
- Not all hotel bills are deductible, cutting costs like gym access can help keep your deduction compliant.
- You can deduct the expenses of tagging your spouse along if they are an employee
- Meal costs are deductible up to 50%
6. Keep Track of Your Expenses
The IRS is very critical of detailed documentation, which enhances transparency. Suppose you want to take advantage of every little opportunity to reduce your taxable income and qualify for all kinds of possible deductions.
In that case, your files must reflect the same, and they must be accurate. Tracking is one way to ensure nothing gets lost all year long. While manual recording is an option, it is obsolete and prone to errors, duplication, and miscalculation.
Online accounting software and apps solve all problems by keeping accurate records of all expenses on one interface, including expenditures from integrated credit cards.
7. Restructure Your Business
Many business owners do not think restructuring is essential in saving tax, according to Inc. Magazine. However, reinventing your enterprise can bring an array of added tax-saving opportunities. The most direct advantage is that your first $50,000 will be taxed at 15% instead of a possible 35% when you transform from an S to a C corporation.
Consider also restructuring your way of rewarding employees. It is okay to raise their salaries, but the raise would be taxed and slashed, leaving them with only a small fraction. On the other hand, adding the same to employee benefits will suit both worker and company.
Let’s say you give an employee $300 more for medical insurance, the lot that would not be deducted by income tax, FICA, and Medicare; hence it is a win-win for both parties.
Be Smart About Your Business Taxes
There are many factors and IRS rules that govern the taxation process. While many large business establishments have mastered the art of saving on taxes, small enterprises tend to take time to learn the tips and tricks.
Oftentimes, SME’s end up conducting inefficient tax filing that costs them money. From hiring professional tax experts to maximizing deductions, the above ways are a great starting point to ensure better you save money on taxes.
Remember that one major reason small business persons miss out on enticing deductions is the failure to keep up with reforms. The IRS, Legislation, and other law-enacting bodies regularly release taxing updates throughout the year, and you should try to keep up.