Small business owners have many ways they can reduce their tax liability through various deductions available to them; an IG advisor can assist in choosing which is most appropriate for their operation.
Deductions and credits can reduce your taxable income while saving money in future filings. Employing these strategies could save both time and money in filings to come.
1. Hiring a Family Member
Hiring family members as employees can be one of the easiest and most cost-cutting strategies for small business owners looking to reduce taxes. While this strategy has its challenges, hiring family members must abide by IRS employment regulations; family members must be treated like any other employees and be paid an appropriate, fair rate for the work they perform. Furthermore, personal/familial discussions must remain at a minimum while the business operates outside its family environment at all times.
Financial records must be kept, which could lead to IRS or state tax agencies investigating these businesses and building a case against them using estimated amounts owed for family employees not withheld from taxes. Additionally, make sure any family employees you employ do work that’s important and relevant for your business as well as being appropriately qualified for their positions.
2. Changing Your Business Structure
Reduce tax liabilities is essential when operating a business, and there are various strategies you can employ – from shifting business structures to writing off bad debts – that will help minimize tax obligations.
Selecting the ideal business structure can have far-reaching ramifications for everything from how the IRS taxes your profits to your risk of personal asset exposure. Common structures for small businesses include sole proprietorships, partnerships, limited liability companies and S corporations – with the Tax Cuts and Jobs Act of 2017 adding a qualified business income deduction that supports LLCs, S-corps and certain partnerships as possible options.
If your company has outgrown its original structure, restructuration could provide opportunities for greater tax advantages. If you started as a sole proprietorship or partnership but now transport hazardous and dangerous goods as part of a delivery service, perhaps incorporating may provide added personal asset protections and increase tax opportunities.
3. Putting Away Money for Healthcare Needs
As with a rainy day fund, opening an HSA or limited purpose flexible spending account (LPFSA) is an effective way to lower your tax bill. These accounts enable you to set aside pretax dollars that can later be used to cover medical expenses like deductibles, copayments and coinsurance payments.
Tax planning for small business owners often aims to minimize adjusted gross income (AGI), which covers your taxable wages, investment dividends and capital gains, retirement account distributions, alimony payments, student loan interest payments and educator expense reimbursements. Deducting as many expenses as possible; using apps or programs to track mileage and receipts and maximizing 401(k) contributions are excellent ways of accomplishing this objective.
As 2018 comes to a close, now is an opportune time to evaluate your tax situation and make any needed modifications ahead of 2023. Speak to one of CMP Advisor’s tax specialists regarding reviewing current finances and creating a strategy for optimizing tax situation.
4. Changing Your Tax Status
Small business owners wear many hats; from managing HR issues and customer complaints to overseeing operations and handling financial paperwork. But one aspect often neglected by their peers when running a company is taxes.
Small businesses can make significant savings by incorporating, changing their tax structure and taking advantage of tax credits. Each strategy presents its own set of challenges; before taking any significant steps towards change to your business it is recommended that you consult a qualified tax professional first.
Dependent upon your tax bracket, you can also make strategic choices to postpone income. For instance, this could involve increasing billing and collection efforts at the end of the year or deferring purchases until next year’s expenses come due.
Additionally, you can take steps to reduce your adjusted gross income (AGI). Effective tax planning entails increasing retirement plan contributions and claiming all available deductions; doing this will lower your tax bill come filing time in 2024.