Tax planning strategies for small businesses can help you get organized, slash your tax bill, and avoid pesky late filing fees. At the end of it, you may vow to prepare better for next year. Business tax planning strategies involve various techniques and approaches that aim to minimize tax liabilities while remaining compliant with applicable tax laws.
common used Tax Planning Strategies for Small Businesses:
Expense Deductions:
One of the most effective ways to lower taxable income is to claim all company costs. Rent, utilities, salary, professional fees, travel, lodging, and advertising are fair company expenses. It is crucial to keep detailed records of any tax-deductible money spent.
Depreciation and Asset Expensing:
Understand depreciation and asset expensing tax regulations as they can lead to large tax savings potential. Businesses may use bonus depreciation provisions to deduct a greater portion of an asset’s cost in the year of purchase, depending on the applicable rules and regulations, or accelerate depreciation deductions for specific assets.
Hiring and Incentives:
Employing particular people, such as veterans, long-term jobless employees, or those from designated empowerment zones, might benefit from tax benefits. These financial benefits for the company while promoting employment initiatives may come in tax credits or salary subsidies.
International Tax Planning:
Understanding and managing foreign tax legislation may help organizations with global operations achieve the best possible tax results. Using tax treaties, transfer pricing policies, arranging for foreign tax credits, and using offshore structures in line with applicable tax regulations are some tax planning strategies.
Income Deferral and Timing:
The timing of recognizing income and expenses can cause variations in the amount of taxable income for a particular year. Taxpayers can manage their tax liabilities by postponing revenue to the following year or accelerating spending to the current year.
Fund Retirement Plans:
One of the business tax planning strategies includes retirement plans. Retirement plans offer firms the same tax breaks enjoyed by their employees. Think about a defined benefit plan to gain significant tax savings.
In essence, this is a pension plan. Compared to defined contribution plans like IRAs and 401(k)s, they can allow corporations to save far more money tax-deferred. The problem is that defined benefit plans are just as hard to understand as IRAs. Setting one up requires specialist help. Additionally, not all firms should use them.
Leverage Health Savings Accounts:
The contributions will be seen as tax-free. In addition, withdrawals are tax-free for cases of qualified health expenses.
Before beginning any tax planning, consult a licensed tax professional or accountant familiar with your company’s specifics and the applicable tax laws. Effective tax planning requires staying educated and getting competent assistance because business tax rates and laws might differ based on the jurisdiction and change over time.
Tax Planning for Small Business Owners
As their income rises, small business owners should actively plan their taxes to avoid unexpectedly high tax obligations. A successful firm must prepare its taxes, and there are many ways to reduce tax liabilities, particularly for enterprises with higher annual revenues. Optimizing home office deductions, increasing retirement contributions, and paying down debt are a few tactics.
Make the most of your home office deductions
Many people frequently overlook their home office, which could significantly reduce their tax liability. It is also accessible for all residences, including houseboats and studio apartments (although not for hotels or Airbnbs you visit). Your space must satisfy these two conditions to be eligible for a home office deduction:
- Regular and exclusive use: You must only do business in the area you believe to be your office. For instance, you cannot claim this deduction if you utilize a guest bedroom as your office and a place for your in-laws to stay.
- Principal place of business: Your primary business location must be your home office. That implies that you don’t have a second office. Your home office must be “exclusively and regularly used for administrative or management activities.” The term “management activities” covers paying clients, conducting sales calls, keeping books, and scheduling meetings.
Top 6 Business Tax Planning Strategies
Review the Company’s Legal Formation
Your small business’s organizational structure will affect how you submit your taxes. However, you are not obligated to choose one of these forever.
Small business owners might change the structure as their companies grow to accommodate their growth better. For instance, limited liability organizations (LLCs) can choose C corporation taxation regimes by submitting Form 8832 to the IRS. Corporate income tax does not apply to pass-through entities like sole proprietorships, partnerships, LLCs, and S companies.
Claim All Legitimate Tax Deductions
The IRS statute includes provisions for tax deductions to promote certain Business tax planning strategies and discourage others that could get you into big financial difficulty. For instance, charitable contributions to Church or temple institutions and other organizations are tax-deductible, encouraging people to freely support their charitable endeavors. The law provides several tax deductions for small enterprises in order to boost economic activity. There are many others, but these concerns:
- Activities involving marketing and promotion that put your goods or services in front of customers to increase sales.
- Insurance protects against any loss or responsibility suffered during normal business activities.
- We all need to eat; therefore, business dinners fulfill the needs of those hungry and the bottom line.
- Another typical company expense and allowable deduction from business revenue is travel.
- The future of the organization and workforce’s future is invested in by continuing or degree-focused education.
- The ITS views contributions to retirement plans as beneficial; therefore, they frequently qualify as tax deductions.
Use Available COVID-19 Relief Benefits
A wide range of allowable tax deductions can be found using wise tax planning techniques. The Coronavirus Aid, Relief, and Economic Security Act (CARES), which provides financial assistance for COVID, results in significant tax savings. This worked as jobs act in many respects by protecting employee wages as business owners battled to remain afloat. The following principles underlie this legislation, among others:
Employee Retention Credit
The amount that a small business must pay for Social Security is deducted from the tax credit known as the Employee Retention Credit. Every fiscal quarter, small business owners who qualify must apply and provide proof of one of the following:
1) To stop the spread of COVID-19, the government has issued an order to small businesses. Any minor company, including a restaurant, bar, bowling alley, hotel, professional sports franchise, barbershop, and hair salon, can be susceptible to such a mandate if considered unimportant to the general public.
2) Small firms experience large income losses due to pandemic-related closures and a decline in economic activity. For example, suppliers of shuttered restaurants lose out on sales revenue. If they can credibly attribute the outbreak as the reason, these tax credits may be available to them.
Sick and Family Leave Credits
With the help of the Families First Coronavirus Response Act of 2020, small businesses can offer their staff two weeks of paid sick time. If an employee is placed in quarantine while awaiting medical attention, the small business must pay the employee’s usual compensation or salary. On the other hand, if a staff member stays home to care for a COVID-affected family member in quarantine, the business will pay them 66% of their regular salary.
The American Rescue Plan Act of 2021 prolonged both of these tax code provisions such that they would be in effect through the end of September 2021. Small business taxpayers can request some of them retrospectively under existing tax legislation by changing the submitted tax return.
Delay Income – or Expedite It
Sometimes, smart tax planning necessitates delaying the receipt of particular cash streams. This occasionally entails the straightforward timing discipline of billing in the middle to end of December to ensure payment receipt in January of the subsequent tax year. Delaying taxation is not the same as avoiding or avoiding. On those funds, taxes will be paid. It hinders the tax payment until the following year and shifts the tax burden.
A different method of tax planning makes use of accelerated income. Business owners anticipating increased taxes may maximize their earnings before the hammer comes. On the one hand, they can increase billing and collections before the end of the tax year. On the other hand, they can postpone making any purchases or wait to pay any expenses until the new year. By doing this, they can save more operating capital when filing their business tax return.
Shrink Your Adjusted Gross Income
For example, when computing gross income, the business uses the total of all revenues, wages, business income, investment dividends, capital gains, and retirement account earnings. AGI (Adjusted Gross Income) takes into account funds that the business diverts to a certain use.
These include employment payments to retirement funds, alimony given to a former spouse, student loan interest, and costs associated with the demands of educators. The goal of ideal tax planning and preparation for small businesses is to maintain a low AGI.
There are methods for doing this. Contributions to employee health savings accounts are one option. Another way to reduce AGI is to increase retirement plan contributions to the maximum extent law permits.
The home office deduction, if applicable, can dramatically reduce an independent contractor’s AGI concerning self-employment taxes. Additionally, interest on business loans, real estate, equipment, etc., can be subtracted from gross income to get a lower AGI.
Have a Plan to Reimburse Employees for Expenses
Employees frequently incur expenses while performing their tasks. The company covers the cost of things like meals, transportation, and entertainment, as opposed to personal expenses. However, it is incorrect to classify these work-related costs as employee income.
In contrast to taxable income, accountable plans are means of documenting reimbursement. Payroll taxes for the business owner would increase significantly if this money were considered income. With the help of a tax expert or organization that offers tax assistance, accountable plans are simple to set up.
Wrapping Up!
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