Tax planning is an essential part of running a successful business. In this week’s newsletter, we will discuss some tips and tricks to make sure you get the maximum benefit to minimize your small business taxes each year. Let’s dive in!
1. Reduce Your Adjusted Gross Income
Most of the taxes you pay depend on your adjusted gross income or AGI. If you have a lower AGI, you can keep your income in lower tax brackets. This will help you benefit from more tax credits or avoid additional taxes. Some of the ways that may lower your AGI are the following:
Itemizing deductions if they exceed your standard deduction (consider mortgage deduction, property taxes, and charitable donations),
Contributing to retirement accounts that are tax-deferred
Contributing to a Health Savings Account (HSA)
2. Choose the Right Business Structure
Choosing the right business entity for your business is important as it may potentially improve the tax efficiency of your business.
Most small businesses start as sole proprietorship. This is largely because sole proprietorships are so easy to start. Sole proprietorships are considered as “pass-through” entities. This means that their business income and expenses are passed onto the business owner resulting in your business to pay the same tax rate you do, depending on your income bracket.
On the other hand, if you incorporate your business, it can reduce your tax liability since the Tax Cuts and Jobs Act (or TCJA) lowered the corporate tax rate to 21% in 2017. It can also save you money on self-employment tax.
Each business structure has its own tax benefits and drawbacks so it is important to do your research or consult with an expert to help you identify which entity type will best suit your needs.
3. Establish Fringe Benefit Plans for Employees
Increasing your employees’ wages would trigger a higher employment tax cost. One way to solve this problem is to offer fringe benefits as part of employees’ compensation. offering employees income-based fringe benefits could reduce tax liability of employers. This can also help employees reduce their income taxes by offering benefits on a pre-tax basis.
To qualify for these benefits, an employer must meet certain criteria under the IRS guidelines. According to the IRS, an employer must offer more than de minimis (a minor or trivial benefit) and provide these benefits on a non-discriminatory basis.
Health insurance premiums, childcare, transportation vouchers, and retirement-account matching contributions are among the most common fringe benefits.
4. Employ a Family Member to Work in the Business
One of the best ways small businesses can reduce their taxes is hiring a family member. The Internal Revenue Service (IRS) provides a variety of options, all with the potential benefit of sheltering income from taxes. Income paid to your children has a lower marginal rate and sometimes the tax can also be eliminated. If your business is under sole proprietorship, you do not need to pay social security and Medicare taxes on their wages. However, you need to make sure that the earnings need to come from justifiable business purposes.
Meanwhile, adding your spouse to the payroll could also reduce taxes since the earnings will not be subject to the Federal Unemployment Tax Act (FUTA). It could also double your retirement plan and increase Social Security benefits.
5. Utilize Your Retirement Plan Contributions
Small business owners can save on taxes by maxing out their retirement contributions. Larger contributions mean larger tax deductions, resulting in a lower overall tax bill. The amount you can deduct depends on the type of plan you have.
If you are a high income business owner, consider cash balance plans and put away more money for retirement. While both 401(k) and cash balance plans are tax deductible, 401(k) will only allow you $55,000 contributions with $6,000 catch-up contributions, whereas the cash balance plan could permit you to defer $100,000 to $300,000 additionally.
You may check out the IRS’s tips for calculating your own retirement plan contribution and deduction for more information or seek a professional to help you determine your eligibility and limitations in your retirement plan contributions.
6. Take Advantage of Carryover Deductions
Business owners can benefit with multiple deductions and credits to reduce their tax liability and even generate a refund. However, there are some limitations to this you can’t always take full advantage of a deduction or credit in the current year. Good news is that these deductions allow a carryover to future years but there are rules for how and when you can do so.
Some examples that business owners may be able to carry over are capital losses, general business credits, home office deductions, net operating losses (up to 80% of taxable income), and charitable contributions.
7. Adopt Accountable Plans
Reimbursing your employees for mileage, travel, or other expenses can save business owners money on taxes by adopting accountable plans. This is because reimbursements are not counted as part of W-2 income and are exempt from FICA and FUTA taxes.
8. Optimize Tax deductions
As business owners, you should deduct everything for which you are eligible as much as possible to minimize your tax liability.
There are so many expenses that you may not know you can deduct and benefit from like travel, office supplies, marketing. You also need to know that when you deduct your expenses and apply tax credits, you’ll need meticulous records. You need to set up your books and expense management to categorize your tax-deductible expenses and be sure to capture receipts for future access. Therefore, working with a tax professional is crucial for you to understand exactly what you can deduct in your business expenses and learn how to set up a bookkeeping system for business.
9. Stay current On Small Business Tax Law Changes
Tax law is changing constantly, and these potential changes could impact business owners. It is imperative to stay up-to-date on the current tax regulations and deduction particulars so that you can take full advantage of the most recent changes.
10. Consult a Tax Planner
With wise planning, you can reduce your taxable income as a small business owner and keep more of your money working for you. But remember, there are many laws and intricacies associated with business taxes, and you don’t want to risk overlooking something important when it comes to your taxable account so it’s better to discuss these tax planning strategies with your tax professional before making any significant moves.
Do you need assistance planning your income tax strategy to cut down your tax bill? Legacy Solutions is here to help! Book a FREE strategy call now by clicking this link: https://calendly.com/legacy_solutions/strategysession