7 Tax Saving Strategies for Business Owners
Tax savings strategies for business owners can be the difference between barely scraping by and thriving.
We value the benefits of taxes - infrastructure, safety, and more - but there’s no reason to pay more than your fair share. As a business owner, taxes are a significant expense.
But with strategic planning, you can legally minimize your tax burden and keep more of your hard-earned profits.
In this article, we'll explore seven tax saving strategies for business owners that could make a big difference in your tax bill and keep you on track for your goals.
Tax Saving Strategies for Business Owners
At Accounting Made Accessible, we always suggest ensuring your tax strategy is a year-round process, instead of a rush at the end of the year. For any tax strategy, we suggest speaking with a tax professional to ensure you’re in full compliance and maximizing your returns.
1. Optimize Business Structure
The type of business entity you choose (LLC, S-Corp, C-Corp) can have a significant impact on your tax liability. Each structure offers different tax advantages, so it's crucial to select the one that best aligns with your business goals.
Limited Liability Corporation (LLC): Offers flexibility and pass-through taxation, where profits and losses are reported on your personal tax return.
S-Corp: It also provides pass-through taxation but allows for additional tax benefits like deducting owner salaries.
C-Corp: A separate legal entity with its own tax rates, which can be beneficial for certain businesses. Benefits such as health, long-term care, and disability insurance can have their premiums fully deducted. It’s also the only corporate entity that allows for deducting charitable donations as a business expense. However, it increases the risk of double taxation.
Consult with a tax professional to determine the best option for your specific circumstances.
2. Maximize Deductions
By understanding what qualifies as a deductible expense, you can significantly reduce your taxable income.
To maximize deductions, keep meticulous records of all your business expenses, including receipts, invoices, and mileage logs.
Finding good accounting software can streamline this process.
Explore common deductions such as:
Software such as your accounting and tax software
Office supplies and equipment
Travel expenses (mileage, airfare, hotel)
Advertising and marketing costs
Utilities (phone, internet, electricity)
Rent or mortgage interest
Professional development (courses and training relevant to your business)
Consult with a tax advisor to ensure you're claiming all eligible deductions correctly.
3. Leverage Tax Credits
Tax credits directly reduce the amount of tax you owe, making them even more valuable than deductions. We consider this an important component of the tax saving strategies for business owners because many people are aware of deductions, but not specific tax credits which may be available.
Several tax credits are available to businesses, including those for:
Research and development (R&D)
Energy-efficient improvements for your office
Hiring certain categories of employees (veterans, disadvantaged workers)
Investigate the tax credits that your business might be eligible for and understand their requirements. Certain industries, such as agriculture, may have industry-specific tax credits.
To claim a tax credit, you'll typically need to file specific forms with your tax return and provide documentation to support your eligibility. The exact process and required forms will vary depending on the specific credit you're claiming.
A tax professional can guide you through the process of claiming these credits and maximizing their benefits.
4. Defer Income and Accelerate Expenses
This strategy involves shifting income to the next tax year and prepaying expenses in the current year. By doing so, you can reduce your taxable income in the current year and potentially lower your overall tax bill.
The idea is to reduce your taxable income in years when you expect to be in a higher tax bracket and increase it in years when you expect to be in a lower bracket. This can help you save on taxes overall.
Let’s use some examples to make this clearer.
Deferring Income:
If you’re a freelancer with a big project finishing up in December, you may have some flexibility with invoicing for the project. If you invoice the client early, you'll receive the payment in December and it will be counted as income for that year.
But if you wait until January to send the invoice, you delay receiving the payment until the next year, potentially pushing it into a lower tax bracket.
Accelerating Expenses:
On the flip side, imagine you're planning to buy a new computer for your business. If you buy it in December, you can deduct the cost as a business expense in the current year, reducing your taxable income.
However, if you wait until January, you'll have to wait another year to claim that deduction.
Important Considerations:
Cash Flow: This strategy only works if you have the cash flow to support it. You don't want to delay paying bills just to save on taxes.
Tax Laws: Tax laws can be complex, and the best approach for your business might vary. It's crucial to consult with a financial advisor or tax professional to make sure this strategy is right for you and to ensure you're complying with all regulations.
5. Utilize Retirement Plans
Setting up a retirement plan for yourself and your employees, such as a 401(k) or SEP IRA, not only benefits your long-term financial security but also offers tax advantages. Understand the contribution limits for different types of retirement plans and maximize your contributions to reduce your taxable income.
Consider offering matching contributions to your employees to incentivize participation and further reduce your tax burden.
6. Employ Family Members
Hiring family members can be a tax-efficient strategy for small businesses. By paying them reasonable wages for work completed, you can deduct their salaries as a business expense, lowering your taxable income. You can even hire your children if they’re able to complete the work. However, ensure you comply with labor laws and pay fair wages to your family members to avoid any potential issues with the IRS.
As we say with all of our tax saving strategies for business owners, check with tax professionals to make sure you’re using this strategy correctly and to its full potential.
7. Take Advantage of Depreciation
Depreciation is a tax deduction that allows you to recover the cost of business assets over time. There are various depreciation methods, including accelerated depreciation, that can significantly reduce your tax liability in the early years of asset ownership.
Let's say your small bakery purchases a new oven for $10,000. Ovens typically have a useful life of 10 years. Using straight-line depreciation (a common method), you could deduct $1,000 per year for 10 years.
However, there are accelerated depreciation methods available, such as Section 179 deduction or bonus depreciation, that allow you to deduct a larger portion of the oven's cost in the first few years. This can result in significant tax savings, especially if you're a new or growing business.
Important Considerations:
Not all assets are depreciable. For example, land cannot be depreciated.
Different assets have different useful lives and depreciation methods.
Proper documentation is crucial for claiming depreciation deductions.
As always, consult with a tax professional to determine the best depreciation method for your specific assets and business situation. Familiarize yourself with the IRS regulations regarding depreciation and consult with a tax professional to determine the best approach for your business.
Take Advantage of Tax Saving Strategies for Business Owners
By implementing these tax-saving strategies, you can keep more of your hard-earned money and invest it back into your business. Remember, tax laws are complex and can change frequently, so it's always advisable to consult with a qualified tax professional to ensure you're taking advantage of all available opportunities, complying with all regulations, and choosing the right goals for your business.
Ready to optimize your tax strategy? Book a free strategy call with Accounting Made Accessible today. We’re experts in tax saving strategies for business owners, so don’t hesitate to reach out! We’ll help you minimize your tax burden and achieve your financial goals.