10 Tax Planning Strategies for Small Business Owners
Staying up with your taxes and accounts is the least interesting part of owning a business. But strategic business tax planning is extremely crucial. It is the only way to minimize your overall business liabilities and prevent year-end tax headaches.
To stay ahead in the game, small business owners must start early. They need to plan and manage their taxes and investments right at the start of the year when the intimidating tax season is far away.
So, this year, add some tax preparation into your overall business strategy and keep your finances and taxes on point.
Here are 10 proactive tax planning tips that can help you take control of your finances and tackle your annual taxes like a pro.
1. Choose the Right Business Entity
Different business structures – Sole Proprietorship, LLC, Partnership, and S Corp – are eligible for different deductions and credits. For example, while S Corp owners can take advantage of the qualified business income deduction (QBID), LLCs and corporations can seek benefits from liability protection.
So, if you are still in the process of company formation, make sure to choose the right entity for your business on the basis of your business goals, liability concerns, and tax situation.
Seek help from an expert tax professional to determine which structure is best for your business and can provide the most tax savings and make a switch, if the need arises.
2. Reduce Your AGI (Annual Gross Income)
AGI or Adjusted Gross Income is your modified gross income, i.e., gross income minus certain deductions, which include business expenses, student loan interest payment, and more. It’s used by the IRS to determine how much income tax you owe. By lowering your AGI, you can easily keep your income in the lower tax brackets and seek benefits from available tax credits. To reduce your annual gross income:
- Contribute to a retirement plan: Traditional IRA or 401(k) are usually tax-deductible and can help you keep your AGI in the lower brackets.
- Make charitable contributions: Charitable donations are tax-deductible too and can help save on taxes.
- Take advantage of your Health Savings Account (HSA): Contributions to an HSA can help you keep your AGI low.
- Claim above-the-line deductions: Student loan interest, tuition, and fees can also be used to reduce your AGI.
- Defer income: If possible, try to postpone receiving income from your investments till the next tax year to reduce your current-year tax liabilities.
However, before investing, consult an experienced tax professional to determine which deductions are applicable and beneficial to your business.
3. Offer Fringe Benefits to Employees
Consider giving your employees annual bonuses and retirement benefits. It’s not only an excellent way to keep your employees motivated, it also serves as an excellent tax-saving strategy for your business.
Some fringe benefit plans that you may want to consider include medical insurance, group life insurance, transportation reimbursements, childcare support, employee meals, and educational fee reimbursements.
4. Invest in Business Insurance
Your business needs protection too. While you may knock down the idea considering it to be an added expense, the good news is that your business insurance premiums are tax deductible and are counted separately from your health insurance premiums.
Some business insurance that you can consider include liability insurance, malpractice insurance, error and omission (E&O), and workers’ compensation insurance.
5. Add a Full-Blown Marketing Plan to the Mix
Did you know IRS provides tax benefits for the money you spend on marketing your business? So, create a powerful marketing strategy and make people aware of your business. It will not only help you win more customers, but save big on year-end taxes too.
6. Outsource Your Legal and Professional Services to Experts
Legal and professional fees that are directly related to your business are generally deductible. So, delegate your legal and business tasks like Tax, Accounting, Payroll, and Bookkeeping Services to expert professionals to maximize your business functions and capitalize on the tax exemptions they provide.
7. Keep an Accurate Track of All Your Spending
No matter how much you spend and what you spend on, keep a track of all your expenditure. It helps you to easily pin down all your fixed and variable expenses while preparing your return. So, whether you are buying office supplies or using your vehicle for office trips, make sure to add their bills to your deductions while calculating your taxes. You’ll be surprised to know how much money you have been actually leaving on the table.
So, take some minutes off your busy schedule and keep an accurate record of all your business expenses. You can even use an app to track your spending.
8. Maintain Business and Personal Expenses Separately
Never mix your business expenses with your personal spending. It will become extremely difficult to segregate them later. So, instead of adding those office supplies to your daily shopping cart, order them separately. Set up a different bank account for your small business and make all business-related purchases using your business credit card only.
9. Stay Current with All the Tax Law Changes
Every tax season brings changes in the tax rules and norms. As a small business owner, you don’t have to be a tax expert, but staying up to date with the changing tax laws is important. You’ll know how the new federal and state tax codes will affect your business and the steps you can take to reduce your business’s tax liability.
Keep yourself aware of the new tax norms as well as investments that can bring maximum deductions. Staying in touch with a certified tax consultant can help.