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Tax planning strategies for small businesses that you need to know

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To create a successful tax planning strategy, small business owners should engage with an experienced tax advisor, EA or CPA. 

The more accurate your projections are, the more successful your tax planning efforts are. Right now, your accountant is reviewing your records to determine how much you owe the IRS or how much the IRS owes you. 

Maybe you’re new to tax planning for small businesses, or maybe you’ve fallen behind this year. If you are uncertain about small businesses’ tax planning strategies. You’ve come to the right place. We’ll cover a lot of the approaches small business owners can use to plan their tax year.

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The Best Tax Planning Strategies To Help You Save On Your Taxes

Small businesses can use the following strategies to reduce their taxable amounts at year-end and plan their taxes accordingly. Furthermore, hiring a professional consultant such as a CPA or an Enrolled Agent l can help you be aware of recent changes in tax laws and discover additional options to reduce your liability.

  • 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 goal is to temporarily postpone income recognition in order to take advantage of lower tax rates or to match recognition with a company’s cash flows.

Reduce your tax burden this year by deferring any income you can. Earned income is taxed in the year it is earned. Postponing your income makes sense if you believe you will be in the same or lower tax bracket in the future.

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.

  • Maximizing deductions

In tax planning, maximization of deductions refers to the practice of identifying and claiming all applicable tax deductions in order to decrease taxable income and lessen tax liabilities. This could be done by:

Keeping track of expenses: Keeping a note of all eligible expenses such as charitable contributions, mortgage interest, medical bills, and so on.

Understanding tax rules: Keep up to date on changes in tax laws so that you are aware of new deductions and credits.

Itemizing deductions: If you have a reduced tax obligation, itemize your deductions instead of accepting the standard deduction.

Timing expenses: Try scheduling spending to coincide with the tax year, such as paying some bills early and deferring others.

Seeking expert assistance: Consult with a tax professional for personalized advice on how to maximize deductions and reduce tax liability.

Here are some common deductions that small business owners can take:

Health insurance premiums: You may be eligible to deduct the money you spend on health insurance premiums for yourself, your spouse, and even your dependents.

Marketing: Any money you spend on digital or conventional marketing, your website, conferences you attend, business cards you manufacture, and other expenditures that raise awareness of your company can be deducted.

Business insurance: Any liability insurance, worker’s compensation, errors and omissions, and so on, can be deducted.

Travel expenditures: Any business-related travel can be deducted, so keep a note of all receipts and expenses.

  • Choosing the right business structure

Business structuring is vital for tax planning since the legal structure selected for a business may have a substantial influence on the amount of taxes owed. A sole proprietorship is a basic structure that is straightforward to set up, but the firm owner is solely accountable for all liabilities and taxes. 

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

An S Corporation, which enables the firm to be treated as a pass-through organization, implies the corporation’s revenue is taxed only once, at the individual owner level.

By considering aspects such as the size and type of the company, the number of owners, and the projected earnings, a tax planning consultant can determine the best structure for the company.

By adopting the right structure, a business can lower its tax liability, thus freeing up resources for expansion and development.

  • Taking advantage of tax credits 

Small business tax planning sometimes involves the use of tax credits to decrease the company’s tax liability. Among the tax breaks available to small enterprises are:

Small Business Health Care Tax Credit: This credit is offered to small firms that provide their employees with health insurance coverage.

Employer-Provided Child Care Credit: This credit is offered to small firms that offer on-site childcare to their employees.

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-Efficient Commercial Buildings: This deduction is offered to small firms that increase the energy efficiency of their commercial buildings.

New Markets Tax Credit: This credit is intended to stimulate investment in low-income neighborhoods and can be a considerable advantage to small enterprises operating in these areas.

Small businesses can reduce their tax burden by taking advantage of various tax incentives. A tax planning specialist can help small business owners determine if tax incentives are available to them.

  • Purchasing capital assets

Purchasing capital assets is a regular tax planning approach utilized by individuals and organizations. 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.

Depreciation: Capital assets can be decreased in value over time, allowing taxpayers to deduct a percentage of the asset’s cost each year. This lowers taxable income for the year and can result in substantial tax savings over time.

Expensing under Section 179:  This United States Tax Code allows businesses to deduct the entire cost of certain eligible capital assets in the year of purchase rather than depreciating the item over time. This might result in a bigger tax benefit in the year of purchase, which is particularly advantageous for small firms.

Bonus Depreciation: Bonus depreciation is a transitory tax advantage that allows firms to write off a higher amount of the cost of a capital item in the year of purchase. This can result in considerable tax savings for enterprises that acquire new capital assets.

  • Retirement plan contributions

Contributions to retirement plans are a frequent tax planning approach used to decrease taxable income and save for retirement. Individual retirement accounts (IRAs) and employer-sponsored plans like 401(k)s and pensions are two forms of retirement plans.

Contributions to a traditional IRA:

Traditional IRA contributions are tax-deductible, decreasing the taxpayer’s taxable income for the year. The funds grow tax-free until withdrawn in retirement when they are taxed as income.

Contributions to a 401(k) plan:

Contributions to a 401(k) plan lower taxable income for the year, and the money grows tax-free until taken in retirement. Employer contributions to a 401(k) plan can also lower a company’s taxable income.

Contributions to a SEP-IRA:

A Simplified Employee Pension (SEP) plan is a form of a retirement plan that is particularly advantageous to small firms and self-employed individuals. Contributions to a SEP-IRA diminish the business’s or individual’s taxable income.

Contributions to a pension:

Employer contributions to a pension plan can lower a company’s taxable revenue. Employee contributions may be tax-deductible as well, depending on the plan and the taxpayer’s circumstances.

Accountants can advise people and corporations on the best way to contribute to retirement plans. Consider the taxpayer’s financial status, the kind of plan, and their retirement objectives. People and organizations can lower their taxable income and save for retirement by contributing to a retirement plan.

  • 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.

  1. Document All Expenses:
    Tax-deductible expenses should be documented and claimed on tax returns by keeping detailed records of all business or investment expenses.
  2. Maintain accurate books and records:
    Maintaining accurate books and records, such as invoices, receipts, and bank statements, can help to ensure that all income and expenses are properly accounted for and reported on the tax return.
  3. Keep track of capital assets:
    Keeping track of capital assets can help ensure that all depreciation and other tax benefits are properly claimed.
  4. Maintaining Records for Business Use of Home:
    To claim a home office deduction, taxpayers must keep accurate records of expenses related to the business use of their home, such as utilities and repairs.

In order to properly document all tax-related information, tax planners can help individuals and businesses develop a recordkeeping system that meets their specific needs. Tax problems can be reduced and tax benefits maximized if individuals and businesses keep accurate records.

  • Offsetting gains with losses

Offsetting gains with losses is a tax planning strategy used in small business tax planning to reduce taxable income. 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.

  • Monitoring changes in tax laws

Monitoring tax laws is an imperative part of a small business tax planning strategy. Tax laws are constantly changing, and small businesses need to stay informed about these changes and how they may affect their 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.

In advance of a potential change in tax laws, small businesses can plan to minimize any negative effects. As tax laws change, small businesses should review tax planning strategies regularly to ensure that they are up-to-date and effective. 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.

  • Hiring family members

Small businesses can save money on taxes by hiring a family member. In some cases, you can even hire your children to earn your income without having to pay taxes on it.

Income paid to your children has a reduced marginal rate; in rare cases, the tax is completely abolished. Your child’s salary is excluded from social security and Medicare taxes if your firm is a single proprietorship.

Simply ensure that the earnings are legitimate for commercial reasons. Meanwhile, hiring a spouse would cut taxes since the profits would be exempt from the Federal Unemployment Tax Act (FUTA).

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 learning more

As a small company owner, you may lower your taxable income and keep more of your money working for you by preparing ahead of time. When it comes to tax preparation for your business, you need to be proactive. If you wait until the last minute to prepare your tax return, it will be more difficult and less likely that you will be able to save money. 

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. 

The BFG team is here to assist you with your small business tax planning needs. Feel free to contact us – we may be able to help you reduce your tax liabilities and ensure your business runs smoothly.

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