If you’re the owner of a small business, you want to reduce the amount of taxes you must pay. Tax planning should be a year-round endeavor to ensure you capitalize on all the benefits you’re eligible for. When you hire a tax preparer, they can tell you about certain deductions and credits which may be applicable to your business. However, much of your tax reduction will require you to keep good records all year long or to make changes earlier in the year.
Estimate Your Profit or Loss
Your first step should be to estimate how much money you’re going to earn this year. If you’re new in business, you may even operate at a loss. When you know your projections, you can determine what you need to do to reduce your taxes for the year.
Make Big Purchases Before the End of the Year
If you see that you’re going to make a decent profit for the year, you might want to consider any large purchases you have planned. Don’t wait for next year if you can afford them now to reduce your income. For instance, you may have decided you need a vehicle for the business. If you buy it now, you can deduct your purchase from your profit to reduce the amount you owe in taxes.
Deduct Business Entertainment Expenses
Consider any expenses that you can associate with the business. You may take a client out to lunch or meet with a friend to ask advice on some aspect of your company. Those expenses are allowed as long as business is discussed. Just make sure they are legitimate expenses and you have a receipt for them.
Include Automobile Deductions
If you use your vehicle or a company vehicle for the business, you can deduct the mileage for any business trips. You will need to keep track of all mileage with a log. If you travel a lot or make a numerous small trips throughout the year, the mileage can have a significant impact on your taxes.
Utilize an Accountable Plan
Many businesses reimburse employees for expenses related to the company that they pay for out of pocket. This may include travel and entertainment, purchases of tools or supplies and other expenses. With an accountable plan, you can deduct the expense of reimbursement, but you don’t have to count the payment as income for the employee. This step saves both you and the employee.
Determine How to Deduct Purchases of Equipment
When you make a large purchase of machinery or equipment, you have two options for how you can include it on your taxes. You can deduct the cost of the purchase in full right up front, which will reduce your taxes dramatically if the purchase was significant. The other option is to include depreciation for the equipment over several years. You’ll want to decide which option is best for your business.
Consider Fringe Benefits for Your Employees
Wages are eligible for employment tax, but you can avoid some of these taxes if you provide certain benefits for your employees. These benefits are used to reduce the amount of taxable income you have. They include the following:
You can ask your accountant about fringe benefits and including the costs in your deductions.
Set Up a New Business Structure
Many small businesses start out as a sole proprietorship. However, it may be advisable to change your structure to an LLC, Limited Liability Company, to help you save on taxes. If you can file as an S corporation, you can reduce the amount of taxes you must pay. You choose to pay yourself a salary which will be taxed just like any other salary. However, the rest of the income from the business is not subject to FICA taxes. This can result in significant savings.
Many businesses pay more in taxes than necessary because they don’t realize how to take advantage of legitimate tax breaks and deductions. It’s a good idea to hire a tax preparer who will know the latest credits and deductions available. They can advise you on decisions to make all year long to help you save money at tax time.
