Home Business Tax Planning: 13 Ways to Reduce Tax Liability for Small Businesses

Tax Planning: 13 Ways to Reduce Tax Liability for Small Businesses

by Lee Mark

Business owners wear several hats. If you own a business, you are responsible for handling various obligations. One moment, you may be in human resources; the next, you may be in accounting. All these are necessary to keep your business running. However, handling multiple obligations is complex and makes it challenging to keep up with the less frequent ones like taxes. Many companies face tax challenges, so developing a tax strategy is crucial. It helps govern your processes and provides a system ensuring you fulfill all your tax obligations immediately. Virtually every small business asks itself how it can reduce the taxes it pays. This is an important question since it leads to developing strategies to minimize taxes. The following are thirteen effective strategies that will help reduce the burden of tax liability in your small business.

Hire a Tax Advisor

The best way to minimize tax liability in your small business is to consult a tax professional. Even if you are well-updated with business news and are up-to-date with tax law adjustments, you must get advice from an international tax advisor when filing your taxes. Filing business taxes can be complex, and there are penalties for mistakes and delays. So, hiring a tax advisor costs less than cleaning up the mess after making a mistake on your taxes.

Develop Effective Bookkeeping

Another way you can save on taxes is to develop an effective bookkeeping strategy. Without a solid plan, you will have more liability and lack peace of mind. Make bookkeeping easy by hiring a reliable company like Boardroom to track your financial transactions and other accounting tasks. You can decrease taxes through bookkeeping by creating a reliable system that tracks your earnings and spending details. It is also essential to separate your business funds from personal ones. You must also analyze your accounting methods and know which one to use for your business.

Reduce Adjusted Gross Income

Many of the taxes in the business are related to your adjusted gross income. So, reduce your AGI by lowering your salary or contributing to a retirement plan. You can also lower your adjusted gross income by contributing to a health plan or itemizing deductions. Track your assets throughout the year to help in itemizing. This way, you will not have difficulty calculating them during the tax season.

Net Assets at the End of the Year

In some situations, acquiring new assets at the end of the year is advisable to reduce tax liability. Take this advantage, especially during years when you have earned high profits. Remember that all the assets you bought must work before the year ends.

Rethink Wealth Transfer Plans

A business owner must evaluate the current economic conditions and consider an exit strategy or wealth transfer plan. Begin by reviewing your net income. If it is lower than your expectations, seek out tax credits and other benefits that disqualify you if you have a higher income. It is also good to offer your workers a retirement plan and use the contributions to reduce taxes. Additionally, review your business succession plan. A tax expert helps you evaluate these strategies and get the most from the available opportunities.

Check Carryover Deductions

You know you cannot be eligible for all tax deductions because most have limitations. This goes for tax credits, too. Therefore, you may not be able to use all tax credits in the same year. However, it is imperative to know about these deductions and allow carryovers to the future. For example, some carryover deductions include operating losses, capital losses, home office deductions, etc.

Offer Several Benefits to Employees

Employers can decrease tax obligations in their business by offering benefits to their employees. Employers can introduce fringe benefits to employees as compensation instead of increasing wages, which will trigger higher tax costs. Some benefits eligible for tax exemption include disability insurance, mental and dental insurance, long-term care insurance, transportation, employee meals, etc.

 Help an Employee Pay Student Loan

Another way to reduce taxes is to help employees pay their student loans. Today, employers can help workers with their student loans. In the past, if an employer paid part of the loan, the employee had to pay taxes since the repayment was considered part of their income. Today, employers can get payroll tax exemptions to help their employees pay student loans. By excluding the payment from the income, the employee does not need to pay taxes.

Hire Family Members

Put your family members on the payroll if they can contribute to the business. Children can work tax-free if their income is below the IRS range. You can use the money you pay them or put them into savings for their education.

Take a Tax-Free Loan

Many small business owners are unaware they can take a tax-free or no-interest loan. You should check with the IRS for set rates and know what you need to get a tax-free loan. It is crucial to speak with your accountant before executing this plan.

Evaluate the Type of Business Entity

Your business entity type has a significant impact on tax liability. Sole proprietors with Limited Partnerships or LLCs pay self-employment taxes. If your taxes are high, consider evaluating the ideal steps to cut them down. You may consider reorganizing an LLC as a C corporation to enjoy certain tax benefits. Research different types of business entities and work with a tax advisor to determine the suitable business structure.

Defer Taxable Income

Suppose you are utilizing the cash method in your business. In that case, you can take advantage to manage your taxable income to minimize taxes. Avoid your business income from being taxed by putting recurring expenses on the credit card. Another method can be paying costs toward the end of the year. If possible, delay sending invoices until the last few days of the year.

Write Off Bad Debts

Even though delaying sending invoices can help reduce taxes, it might be problematic if clients don’t pay. Once you deliver services or products, you must collect your payments immediately. However, this is not an excellent approach to decreasing tax liability. If there are bad debts that customers have become too stubborn to pay, consider writing them off. It will help offset taxes for payments you did not receive.

Wrapping Up on Reducing Tax Liability for Small Businesses

Calculating and paying taxes for your small business can be expensive and time-consuming. These thirteen strategies will help you understand tax responsibilities and minimize liability this year. If you need help, consult a tax advisor. The professional will guide you through filing your tax returns and taking advantage of ways to reduce the tax burden.

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