As a small business owner, it’s imperative to keep an eye on your bottom line. You want to save as much money as you can whenever possible. Minimizing tax rates can be extremely beneficial.
You may not think much about your taxes until the beginning of the year rolls around. But your actions throughout the year will affect how much you pay. And when you are stuck with a huge tax bill, you may really regret some of the decisions you made.
But with the right tax planning strategies for your small business, you won’t end up paying a lot in taxes. You may even get money back.
This article will review the small business tax planning steps you should be taking to ensure you get an optimal refund.
5 Strategies for Small Businesses to Reduce Taxes
Here are some small business tax strategy tips that can help you save money:
Strategy 1: Try Reducing Your Adjusted Gross Income (AGI)
Your adjusted gross income (AGI) is what the IRS looks at when they tax your business. And the higher it is, the more money they will take out. Aim to keep your AGI under $200,000 if you are filing on your own, or $250,000 if you are married and filing a joint return. You will avoid paying .9% in Medicare taxes.
Fortunately, there are ways to reduce your AGI as follows:
- Lower your salary
- Contribute to a tax-deferred retirement plan
- Contribute to a health savings plan
- Itemize deductions that go above the standard deduction for an optimal payout
Strategy 2: Consider Changing Your Business Tax Status
Businesses can choose from various business structures such as partnership, sole proprietorship, S corporation or C corporation. Each one is taxed differently. For example, the corporate tax rate was once 35% but it dropped to 21% when the Tax Cut Act of 2017 was introduced.
This compares to the sole proprietorships, LLCs, and S corporations that don’t pay corporate income tax. Instead, the company’s net income transfers to the owner’s personal tax and is eligible for taxes of up to 37%.
While changing your business status may help you avoid high taxes, it shouldn’t be the only reason to make the switch. Tax amounts can change so the focus should be finding the structure that works for you.
Strategy 4: Postpone Taxable Income to End of the Year
Deferring taxable income is a good strategy if you think your income will be taxed at a lower rate next year, or if you think you may be in better shape to deal with a high tax bill next year. Here are some ways to do it.
Use a Credit Card:
Paying with a credit card will allow you to cover expenses and deduct them this year and pay for them next year. It is an especially smart strategy for dealing with recurring expenses.
Mail Checks:
The same principle applies here. If you write the check this year, you can deduct it this year, but it won’t get cashed until next year. Send the check registered mail so you have records of when it was mailed.
Prepay Expenses This Year:
This includes rent and insurance premiums. This small business tax strategy will only be effective if the benefit doesn’t exceed IRS limitations.
Hold off on Sending Invoices:
This means they will be paid next year and be counted in next year’s income.
Strategy 5: Hire Your Spouse or Children
Hiring your spouse will help you shift some of your employee costs to personal costs allowing you optimal deductions.
You can also benefit from hiring a minor child as they can work tax-free if their income is below the IRS threshold.
As a bonus, you can take the money you pay your child and spouse and put it towards family expenses such as college, savings, or vacation money.
4 Strategies for Small Businesses for Claiming Credits and Deductions
Claiming credits and deductions will also help you lower your tax bill. The main idea is to be aware of as many credits and deductions as possible. Then figure out the best tax planning strategies for small businesses to claim them.
Here are some deductions and credits to ask your accountant about.
Strategy 1: The Health Care Tax Credit
To be eligible for this benefit you must employ less than 25 full time employees, pay an average salary of less than $56,00 a year and pay at least half of your worker’s health insurance premiums. If this is the case, the Small Business Tax Credit could provide a credit of up to 50% of your health premium coverage costs.
Strategy 2: Deduct Some Property Expenses
You may be able to deduct up to $100,00 of eligible business property. You may deduct the full amount for the year you started using the property.
Strategy 3: Claim a Credit for Child Care
if your company provides childcare, you may receive a tax credit for up to 25% of your expenses up to $150,000 a year.
Strategy 4: Claim the Work Opportunity Tax Credit
This tax credit is available for people who employ veterans, people belonging to certain minority groups, SNAP recipients, and others. The credit amount varies, but generally, you can receive up to a 40% credit on the first $6000 you pay in qualified wages to members of these groups.
Taxes can take a big chunk out of small business income. These tax planning strategies for small businesses will help you keep more money in your wallet and pay out less to the man
