Tax planning strategies for small businesses

The Ultimate Tax Planning Techniques To Reduce Your Taxes

These are some ways that small businesses can utilize to lower their year-end taxable amounts and adjust their tax planning. Hiring a qualified advisor, such as a CPA or an Enrolled Agent, can also help you stay up to date on the latest tax law changes and identify other ways to lower your burden.

a. Deferring income

Deferring income is the practice of deferring the recognition of income on financial statements to a later date. This involves deferring payment or revenue recognition till a later date. The intention is to synchronize recognition with a company’s cash flows or to benefit from reduced tax rates by temporarily delaying income recognition.

Defer all income you can this year to lessen your tax burden. The year that earned income is earned is when it is taxed. If you think you’ll be in the same tax bracket or a lower one in the future, deferring your income makes sense.

You may wish to accelerate your income this year so that you can pay taxes now rather than later when you are in a higher bracket. By working with a tax expert, you may discover additional tax options to reduce your tax liability.

b. Maximizing deductions

To minimize taxable income and tax liabilities, tax planning practitioners maximize their tax deductions by discovering and claiming all available deductions. This could be done by:

• Monitoring expenditures: recording all allowable expenses, including debt interest on mortgages, medical bills, and charitable contributions, among others.
• Understanding tax rules: Keep up to date on changes in tax laws so that you are aware of new deductions and credits.
• Listing the deductions: Itemize your deductions rather than taking the standard deduction if your tax due is lower.
• Timing of costs: Consider planning your expenditure so that it aligns with the tax year. For example, pay some payments in advance and put off others.
• Seeking professional advice: To receive individualized guidance on maximizing deductions and lowering tax obligations, speak with a tax professional.

The following are typical deductions available to small business owners:

• premiums for health coverage: The amount you pay for your spouse’s, your dependents’, and your own health insurance premiums may be deductible.
• Promotion: You can write off whatever amount you spend on traditional or digital marketing, your website, conferences you go to, business cards you print, and other expenses that help people learn about your business.
• Commercial insurance: You can deduct any worker’s compensation, errors and omissions, liability insurance, and so on.
• Travel-related expenses: You can write off any business trip you take, so be sure to keep track of all your receipts and costs.

c. Choosing the right business structure

The choice of legal structure for a firm can have a significant impact on the total amount of taxes due, so business structuring is essential for tax planning. Although a sole proprietorship is a simple and easy-to-set-up structure, the business owner bears sole responsibility for all debts and taxes. 

A corporation, on the other hand, provides limited liability protection for its owners but is susceptible to double taxation on its profits. 

The adoption of a S Corporation results in the corporation’s income being subject to a single taxation at the individual owner level, allowing the business to be recognized as a pass-through entity.

A tax planning specialist can determine the optimal structure for the business by taking into account factors including the company’s size and kind, number of owners, and expected earnings.

A company can reduce its tax liability and free up funds for growth and development by implementing the appropriate structure.

d. Taking advantage of tax credits

Utilizing tax credits to lower the company’s tax bill is occasionally a part of small business tax planning. The following are a handful of the tax benefits accessible to small businesses:

• Tax Credit for Small Businesses for Health Care: This credit is available to small businesses that provide health insurance to their employees.
• Child Care Credit Offered by Employers: This credit is given to small businesses that provide on-site daycare for their staff members.
• Work Opportunity Tax Credit (WOTC): This credit is offered to small firms that recruit employees from specific target populations, such as veterans or welfare recipients.
• Deduction for Energy-Smart Commercial Structures: Small businesses that improve the energy consumption of their commercial facilities are eligible for this deduction.
• Tax Credit for New Markets: This credit can be very beneficial to small businesses that operate in low-income neighborhoods and is meant to encourage investment in these regions.

Through the use of different tax advantages, small businesses can lower their burden with taxes. Small company owners who want to know if they qualify for tax benefits might consult with a tax planning consultant.

e. Purchasing capital assets

Capital asset purchases are a common tax planning strategy used by both individuals and businesses. Capital assets are long-term investments such as real estate, equipment, or automobiles. When a company or person purchases a capital asset, they might benefit from the tax advantages of depreciating the item over time.

• Devaluation: Over time, the value of capital assets may decline, allowing taxpayers to write off a portion of the asset’s cost annually. Over time, this can save a significant amount of money on taxes by lowering taxable income for the year.
• The Section 179 Expensing Process:  Instead of depreciating certain qualified capital assets over time, this US Tax Code permits firms to write off the whole cost of the asset in the year of purchase. This could lead to a larger tax benefit in the year of purchase, which is especially beneficial for small businesses.
• Depreciation Bonus: A temporary tax benefit known as bonus depreciation enables businesses to deduct a larger portion of the cost of a capital asset in the year of purchase. As a result, Businesses that purchase new capital assets may save a significant amount of money on taxes.

f. Retirement plan contributions

One common tax planning strategy used to reduce taxable income and save for pension is making contributions to retirement plans. Retirement plans come in two flavors: employer-sponsored programs like pensions and 401(k)s, and individual retirement accounts (IRAs).

• Contributions to a traditional IRA:

Traditional IRA contributions reduce the taxpayer’s annual taxable income since they are tax deductible. The money grows tax-free up until it is taken out in retirement and is then subject to income taxes.

• Contributions to a 401(k) plan:

Contributions made to a 401(k) plan reduce annual taxable income, and the funds accumulate tax-free until they are withdrawn for retirement. Contributions made by employers to a 401(k) plan can also reduce the taxable income of the business.

• Contributions to a SEP-IRA:

One type of retirement plan that is especially beneficial to small businesses and independent contractors is the Simplified Employee Pension (SEP) plan. Contributions to a SEP-IRA diminish the business’s or individual’s taxable income.

• Contributions to a pension:

Employer pension plan contributions have the effect of reducing taxable revenue for the business. Under certain conditions and according on the plan, employee contributions may also be tax deductible.

Accountants may provide businesses and individuals with advice on how to make the most contributions to retirement plans. Take into account the taxpayer’s retirement goals, plan type, and financial situation. Contributions made to a retirement plan allow individuals and businesses to reduce their taxable income and save for retirement.

g. Keeping accurate records

Keeping accurate records is critical for tax planning. Tax recordkeeping helps taxpayers take full advantage of all tax deductions and credits, and can help avoid tax problems with the government.

• • Document All Expenses:

Tax-deductible expenses should be documented and claimed on tax returns by keeping detailed records of all business or investment expenses.

• • Maintain accurate books and records:

It is possible to make sure that all income and expenses are correctly accounted for and declared on the tax return by keeping accurate books and records, such as bank statements, invoices, and receipts.

• • Keep track of capital assets:

Keeping track of capital assets can help ensure that all depreciation and other tax benefits are properly claimed.

• • Maintaining Records for Business Use of Home:
    

Taxpayers must maintain precise records of all costs incurred for the business use of their home, including maintenance and utilities, in order to be eligible for a home office deduction.

Tax planners can assist people and organizations in creating a system of recordkeeping that is tailored to their particular requirements, ensuring that all tax-related information is accurately documented. 

Tax problems can be reduced and tax benefits maximized if individuals and businesses keep accurate records.

h. Offsetting gains with losses

To lower taxable income, small businesses might adopt the tax planning method of offsetting gains with losses. The idea is to use losses from one business activity to offset gains from another business activity, thus reducing the overall taxable income of the business. Small businesses need to take into account factors such as the business’s financial situation and the type of losses and gains.

i. Monitoring changes in tax laws

Monitoring tax laws is an imperative part of a small business tax planning strategy. Tax regulations are always evolving, and small businesses must keep up with these developments and how they could impact their day-to-day operations. A tax professional, such as an accountant or tax attorney, can provide valuable guidance on changes in tax laws and how they may impact a small business.

Small enterprises may prepare ahead of time to mitigate the effects of a future change in tax legislation. As tax regulations change, small businesses should examine their tax planning tactics regularly to ensure that they are recent and successful. In addition to monitoring tax laws, small businesses can take advantage of new tax benefits by responding proactively to changes.

In this way, small businesses can ensure that their tax planning is up-to-date and effective, reducing the risk of future tax problems.

j. Hiring family members

Recruiting a family member might help small businesses save money on taxes. You may even be able to hire your kids to work for you and deduct taxes from their earnings in certain circumstances.

Your children’s income is subject to a lower marginal tax rate or, in certain circumstances, no tax at all. Your child’s salary is excluded from social security and Medicare taxes if your firm is a single proprietorship.

Just be sure the profits are legitimate for business purposes. In the meanwhile, since the earnings would not be subject to the Federal Unemployment Tax Act (FUTA), hiring a spouse would result in tax savings.

You can also put the money you pay your kids into an education savings account or a Roth IRA. You are also not obligated to withhold payroll taxes.

Conclusion: Take advantage of tax planning

By planning ahead of time, as a small business owner, you can reduce your tax bill and keep more of your cash working for you. You must be proactive when it comes to tax planning for your business. If you put off preparing your tax return until the last minute, it will be more difficult and unlikely that you will be able to save dollars. 

As long as you stay on top of current and future tax changes, you’ll be able to maximize all your tax benefits and run a profitable business. Be sure to consult a tax professional to determine if you qualify for the possible savings. 

For all of your small business tax preparation needs, the BFG team is here to help. Please get in touch with us; we might be able to assist you in lowering your tax obligations and making sure your company is operating efficiently.