This article explores some of the tax strategies that small business owners can use to not only get through tax season but also to start building towards future success.
Top 7 Tax Tips for Small Business Savings
For startups, choosing the best company form is an essential tax planning tactic. Let’s explore all the tax tips for small business savings in detail:
1. Choosing the Right Business Structure
Your taxes may be significantly impacted by your company structure. There is a need to understand the various tax consequences attached to the various decisions being made. As such, it proves useful to consult a tax consultant in order to determine the most suitable legal business structure and its implications on taxes.
Corporations
Even though corporations have a more complex structure, they offer tax benefits as the business grows. For example, C corporations face double taxation where the company pays taxes on its earnings, and shareholders pay taxes on the dividends they receive. Still, these corporations can keep profits taxed at a lower rate and offer benefits to both employees and owners.
On the other hand, S corporations avoid double taxation by passing their profits and losses directly to their shareholders. This means investors only pay taxes on their share of the company’s earnings on their personal tax returns, which can save them money. However, S corporations have to follow some IRS rules, including restrictions on the number and types of shareholders.
Limited Liability Company (LLC)
An LLC is a separate legal entity that offers some flexibility in how you file taxes. If the LLC qualifies, the IRS allows it to file the return as a sole trader or partnership, and it’s incorporated in the owner’s individual returns. Otherwise, if the LLC wishes to be taxed as a corporation, it has the option of electing to be taxed as an S corporation or a C corporation. Businesses may enjoy tax benefits with S corps and C corps, but their tax filings are generally more complicated.
Sole Proprietorships
If you are a sole trader, then the details of your business income will be reported on your individual tax return. This is because a sole proprietorship is not legally an independent business entity. The required documents to be filed during tax season include a Schedule SE (Form 1040 or Form 1040-SR) for Social Security and Medicare taxes and a Schedule C (Form 1040) for company profits or losses. All potential taxes, obligations, and legal difficulties are entirely your responsibility.
Partnerships
This means that, since a partnership is a pass-through entity, the business itself does not pay tax. It is similar to a sole proprietorship, where both the profit and losses are split between the partners and each partner does his/her own tax return by declaring the portion of the profits from the business.
2. Get the Most from Your Tax Deductions
A deduction is a decrease in the level of income that a company can be taxed on; tracking and claiming as many deductions as possible can lead to a considerable reduction in overall taxation. You can maximize your deductions by getting properly organized, staying up to date about tax laws, and seeking the advice of a tax professional.
Here are a few typical deductions for businesses:
- Deductions for home offices.
- Phone and internet costs.
- Both entertainment and travel.
- Expenses associated with education.
- Costs for tax professionals.
3. Check if You’re Eligible for Tax Credits
Tax credits are just one more method of saving on taxes. While deductions reduce your taxable income, tax credits directly lower the amount you owe in taxes. Here are the common structural tax credits that your company may be eligible for:
- Work Opportunity Tax Credit (WOTC): Any firm that offers employment to members of the targeted groups who have been affected by job barriers is entitled to a tax credit.
- Small Employer Health Insurance Credit: This tax credit may be used by the companies to assist in offsetting expenses of offering health insurance for their employees.
- Credits for clean energy: If your company makes investments in renewable energy initiatives, you can qualify for a tax credit.
Check the IRS website for a complete list of business credits and deductions.
4. Accelerate Deductions or Defer Income
This tip is important for reducing your current tax liabilities. Being an entrepreneur, you can choose when to spend money and earn profit according to your needs.
- Accelerate deductions: If the year is ending and there is a big purchase that you need, make it before the year ends. This way, you can deduct the cost of that item this year rather than the next one and thus lower your taxes.
- Defer income: If a client intends to pay for their goods or services around the end of the year, you should suggest that they pay the bill on January 1st or later. As a result, the income can be included in the following year’s fiscal report; therefore, it is possible to postpone the tax payment until next year.
5. Establish and Contribute to a Retirement Fund
There are several ways that retirement plans might reduce your tax liability.
- Taxable Personal Income: You may deduct contributions to an eligible retirement account, such as a standard 401(k), from your personal taxable income. Your tax bill may decrease as a result of this.
- Taxes on payroll: Payroll taxes are not due on the amount your employer contributes to a retirement plan when you make a matching contribution. This makes it an economical method of paying staff members.
- Company tax liability: Tax-deductible employer contributions and certain fees paid to the retirement plan’s administrators may be subtracted from your total tax liability.
- Retirement plans startup costs tax credit: In the event that you establish a new qualifying plan, such as SEP-IRA, SIMPLE IRA, or 401(k), you might receive a tax credit.
6. Write Off Equipment and Property Expenses
Through depreciation deductions, the IRS permits small businesses to deduct the cost of specific types of property and equipment over a number of years. Dedication of this kind can result in considerable tax savings.
- Deduction under Section 179: Up to a specific dollar level, you can deduct the entire cost of certain kinds of property or equipment with this deduction. The annual adjustment is possible, with a maximum reduction of around $1 million.
- Bonus depreciation: You can take advantage of this tax incentive by deducting more from your first year’s income after you buy eligible property or equipment. This is an attempt to get companies to spend money on expansion.
7. Consult a Tax Advisor
Tax planning techniques are intricate. Many restrictions only apply to specific situations and types of organizations, and tax laws are always changing. A tax expert can assist you in navigating this process and making the best choices to minimize your tax liability and position your company for success. They can assist in the following ways.
- Keep abreast of any tax developments that can affect your company.
- Make sure you continue to adhere to all applicable local, state, and federal laws.
- Assist you with disputes and audits.
- Assist in creating a long-term tax plan that is consistent with your company objectives.
- Give you advice on how your taxes may be affected by business actions.
Improve Your Tax Planning with Eqvista
Understanding taxes is important for making the best financial decisions for your business. Eqvista’s expert tax advisory services can help you navigate the complexities of taxation, minimize your tax exposure and provide guidance on compliance with tax laws, especially those related to employee share compensation. These services help you make better financial choices, take advantage of tax opportunities, and reduce problems, leading to a more effective financial strategy and planning.
Prepare for Tax Season with Cheqly
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