Similar to large enterprises, small businesses prioritize tax savings as well. However, most small businesses approach tax saving less professionally. Let us take a moment to understand why small business tax strategies are of utmost importance.
When the tax season approaches, small businesses seek to reduce the tax bill in every possible way – through deductions, credits, breaks, and whatnot. However, you should know that taking maximum benefits from deductions requires initial planning.
If you organize your business expenses and know what’s deductible and what’s not, you can save more on taxes. Therefore, small business tax planning is essential, and if you are not doing the same, you are operating at a loss.
This blog will get you started on the tax basics for small businesses and top business tax planning strategies. It will help you lead and guide business tax operations and benefit the maximum from the opportunities available.
Before You Plan the Taxes – Tax Basics for Small Businesses
Before you begin with strategic tax planning, you must know some essential concepts of business taxation. In this section, we will brief you on some fundamentals of small business taxes that will prove very useful when you design small business tax strategies.
1. Business structure
Tax rates and liabilities depend on your business structure. A business structure means whether the business is a:
- Sole Proprietorship
- Limited Liability Company
- S Corporation
- International Businesses
Different business structures have different tax obligations, tax rates, and documents required for filing taxes.
2. Types of business taxes
While most people know that businesses have to pay a fraction of their earnings as income taxes, it is not the only kind of tax they pay. Depending on the type of business and trading activities, it might need to pay payroll taxes, property taxes, and excise taxes, among other kinds of taxes.
3. Tax rates
Most small businesses are either sole proprietorships or partnerships. The taxes a small business pays depend on the tax rate it is subject to and the total taxable income in its financial year. The business structure and the tax bracket it falls in decide the tax rate.
4. Taxable income
The gross income is the total income of a business in a financial year. However, not all of it is taxable. The taxable income is what’s left after subtracting eligible deductions from gross income.
5. Tax deductions and credits
Tax deductions are tax exemptions on particular exchanges and transactions. A business must know what business expenses are tax deductible. Moreover, contributions to specific accounts, such as retirement accounts, are tax-free. When coming up with small business tax strategies, you must aim to benefit the most from tax deductions, credits, and additional concessions.
Tax deductions and tax credits are two separate things. Tax deductions are applied to the total income to generate reduced taxable income. You get the tax bill once the tax is calculated by applying the subject tax rate to the taxable income. Tax credits are applied to the tax bill to reduce the final amount you pay in tax returns.
Getting Started with Small Business Tax Planning
How can I lower my small business taxes? The answer to this question is small business tax planning.
One of the critical things in running a business is the efficiency, which is important in all the business operations. Tax planning strives to spend the minimum capital and resources and efficiently carry out tax operations.
Small business tax planning has the following goals:
- Reducing the taxable income and final tax bill
- Preparing accurate tax returns and filing them before the deadlines
- Ensuring compliance with tax laws and regulations
- Conducting rich quality tax research and generating powerful insights
- Supporting business decision-making and growth
Therefore, you can see that the scope of tax planning is much wider than merely preparing and filing tax returns.
Most Effective Small Business Tax Strategies
When you begin with small business tax planning, you might come across many strategies. However, you will have to select the small business tax strategies that will prove the most effective.
It is important to note that the tax strategies for small businesses might differ from those for large enterprises owing to different business requirements, revenue, tax brackets, and tax obligations. Therefore, we have compiled a list of the most effective small business tax strategies that often go unnoticed.
1. Plan ahead for tax deduction optimization
Planning ahead for tax deduction optimization is one of the most crucial small business tax strategies. This includes revising your business structure, shifting your income, and exploring other concessions. Therefore, you should devise the business strategy early in advance to take benefit of the tax deductions, credits, and other concessions.
2. Change your business structure to LLC
We have already mentioned that the tax rate and obligations depend on the business structure. In this regard, a limited liability company is the best option for a small business. Once you convert the business to an LLC, the business can pay tax returns as a C corporation using the IRS form 8832.
The limited liability companies (LLCs) are pass-through entities and do not have to pay the corporate taxes. Moreover, LLCs allow the owners to avail of tax-saving benefits.
Changing the business structure might be a superb small business tax strategy, but it is not easy. It must be meticulously planned and researched with the help of an expert. Therefore, consult an accounting expert to change your business structure.
3. Benefit from deductible business expenses
Deductible business expenses constitute a significant part of the total expenses for small businesses. The business can save money on expenses that are tax deductible.
Managing tax-deductible expenses and saving money on taxation is one of the best small business tax strategies.
Go through the list of deductible business expenses to benefit the greatest from tax-deductible expenses.
4. Employ a family member
The taxes for sole proprietorships are filed in the name of the business owners in their tax returns. The goal here is to show a fraction of income in the name of a family member to exempt that from taxes.
Hiring a family member reduces the total income shown in the name of the owner, and a part of it is transferred to the family. IRS allows you to hire your child as an employee. Moreover, you don’t have to pay social security and Medicare taxes or the Federal Unemployment Tax on the salary of the child.
Therefore, hiring your family can shield a particular amount from taxes generally applicable to your income. Moreover, if you hire a spouse, they will not be subject to the FUTA tax.
5. Healthcare accounts and savings
Take advantage of self-employed health insurance deductions, which offer your business tax break opportunities and protect you from the financial burden of insurance costs.
However, self-employed health insurance deduction is only available for individuals who do not receive insurance coverage from their spouse. The deductions help the employees deduct a part of the insurance premiums.
Healthcare saving plans for employees also bring tax benefits to the business. It is a must to open healthcare savings accounts for yourself and encourage your employees to do the same.
It is because, at some point, you will spend a significant amount on medical expenses. However, if you pay that money from your general savings, you have already paid a good amount of tax.
Instead, put money in your healthcare savings account, which is tax-free. You will not be charged any tax when you withdraw money for medical expenses.
6. Keep track of your receipts and expenses
You can keep track of your receipts and expenses using mobile applications that allow you to save all the receipts. This way, you can save on deductible business expenses on business travel, personal car for business use, etc. These receipts come in handy when you prepare the tax returns at the end of the year.
7. Contribute to retirement plans
The contributions to retirement plans are tax-deferred, meaning you might pay less or no taxes when depositing these accounts. Therefore, save on retirement savings accounts instead of saving money in a savings account.
The taxes are levied when you withdraw from these accounts, which will be less in your retirement years as you’ll fall into a lower tax bracket owing to a lower income.
Here are some retirement accounts the government encourages you to make contributions to.
- 401(k)s, including traditional and SIMPLE 401(k)s
- 457 plans
- Individual retirement accounts (IRAs) such as traditional accounts, Roth, SEP, and SIMPLE IRA accounts
8. Home Office
Using your home for office comes with two benefits – firstly, it reduces the operating cost for your business. Secondly, you can claim tax deductions for using your house for business. You can claim depreciation under sections 32 and 37 for utility bills, property tax, and mortgage.
9. Additional Depreciation
An additional depreciation a small business must know about is a 20 percent reduction on the additional machinery it installs. It applies for only a select industry, which can be checked out under Section 35AD, and is applicable only for the first year of the machinery’s installment.
Delegate Business Planning
The above guide shall equip you with effective small business tax strategies you can use to reduce tax liabilities. However, business tax planning is a large domain that requires significant expertise and knowledge. This is why businesses choose to delegate to accounting and tax experts who have proficiency in the tax landscape across many nations.
We invite you to our affordable tax accounting and advisory services. Take a free trial of our tax advisory services and find out if they suit your business. Dial +1(800) 580-5375 now and connect to our tax advisor.