Every dime saved by a small business owner can be re-invested in his or her business. This makes the exercise of finding legitimate ways on saving on taxes a worthwhile endeavor, and even a must especially if you feel that you’re overpaying your taxes.
Can taxes be overpaid? Sure. You can easily miss common deductions and credits that can save reroute some of those tax dollars back to your small business.
To help you out, we’ve listed a number of ways you can save on your small business taxes.
Check your adjusted gross income
The adjusted gross income, or AGI, is a modification of the gross income in our tax code. Unlike gross income, AGI factors allowable deductions from the gross income to arrive at the income tax liability. There are several deductions you can claim to calculate AGI. A number of retirement plan contributions, HSA deductions, losses incurred in the sale of a property, and some business-related expenses can be written off.
Remember that if you need help, you can always hire a tax preparer to help you out and avoid costly errors.
Make use of accountable plans
Reimbursements made to employees for travel, entertainment, and other similar costs can be written off if they meet certain IRS requirements for accountable plans. An accountable plan works by deducting the expense, but not reporting the expense as an income, sparing them from withholding taxes or W-2 reporting. Keep in mind though that these expenses must be business-related to be considered under the plan.
Make better tax elections
Tax election is the choice you make as a taxpayer on how to deal with a situation in a tax reporting perspective. For example, you can decide if you want to deduct the full purchase price of an equipment or spread out the value of the purchase across years to produce deductions in the future. A number of similar decisions can be made with the help of your accountant, but you should also be aware that the IRS have tightened their rules on these elections owing to tax cheats. Again, it’s safer to ask for help from a tax preparer to be absolutely certain.
Carry over deductions
Some deductions have limitations that make them unusable in the current year, but can carry over in the future. Examples of these are deductions based on net operating losses, home office deductions, and charitable contributions, among others. Remember to keep track of these, so you can claim your deductions when the time comes.
Offer fringe benefits
If you’re worried about the additional tax added by additional wages, consider providing fringe benefits to redice your taxable income. Tax-free fringe benefits include accident and health benefits, educational assistance, group-term life insurance coverage, HSA, meals, and more. The latest edition of the IRS’s Publication 15-B can give you more details on which benefits are excluded from taxation.
Set up a retirement plan
Another way of sheltering profits is putting them in a retirement plan, such as a 401(k). These tax-deferred retirement plans allow employees to postpone paying taxes on the contributions invested; but only during the time when the money is withdrawn, which is often after retirement, which is also the time the employee is in a lower tax bracket. Setting up a retirement plan is not only good for your employees, it also benefits your company because employer contributions to retirement plans are tax deductible and may even qualify you for a tax credit.
Consider passing through
The type of business entity that you’re running with has a big impact on your tax obligations. Most small businesses are registered as a pass through entity, which can be an LLC, a sole proprietorship, partnerships, or an S corporation. Pass-through entities can benefit from a pass through tax treatment, where the taxes of a business “passes through” to the returns of the owner. This set-up insulates the business from double taxation, which taxes the income earned at the business level and the owner’s level. Keep in mind though that this system can also result in a higher tax rate depending on the owner’s tax bracket.
If you need help in lowering your taxes legitimately, our small business tax professionals can help guide you in the right direction. Contact us today at 818-452-2641 or fill out our contact form to schedule a free consultation.
