For small business owners, taxes can be a nightmare. As a business owner, it’s your job to ensure your business has enough money to thrive and survive. Lowering your tax payable is one of the ways to do that. The last thing you want is to pay more of your hard-earned revenue than necessary to the government.
Of course, paying tax is not a bad thing. For one, you will probably get that inner glow from making contributions to the society, and more importantly, it’s a sign that your business is making money. But since it’s a significant outlay for many business, it’s important to make sure you are only paying your fair share.
Fortunately, there are a number of ways to lower the tax liability of a business and save more of the income you generate. So, if you are looking for ways to lower your tax liability this year, check out the following simple ways to achieve just that. However, it’s wise to consult a tax lawyers in ohio prior to using them.
Employ a Member of your Family
Hiring a family member is one of the best ways to reduce the tax payables of your business. The IRS (internal revenue service) provides a variety of options, all of which come with a potential benefit of guarding your income from taxes. It allows you to even hire your children as young as 7 years old. With this strategy, you will pay a considerably lower marginal rate, or even eliminate the tax payable on the income paid to your children.
It’s important to point out that the earnings will have to come from justified business endeavors. Assuming that you can hire your children, their salaries could be put in a Roth IRA, which allows you the tax benefit and offers a way to provide for their future needs. Keep in mind that the IRA also allows you to hire a spouse. Based on the benefits they get via another job, you might be able to put aside some retirement savings for them, and thereby reduce your tax liability.
Know the Deductions You Can Make Legally
Many small business owners are unaware that the IRA offers a wide range of tax deductions that they can use at their advantage. Some of the business expenses that you can deduct from your tax payables include:
- Cellphone bills for the phones primarily used for business purposes
- Mileage and expenses for any personal vehicles used in business operations
- Meals and entertainment expenses incurred with potential or existing partners, contractors, employees, and clients. These are 50% deductible.
- The costs incurred when operating the business from home (part of rent, utility bills, etc.)
- Contributing to and setting up retirement plans
- Costs incurred when acquiring business equipment like printers, computers, phones, and monitors.
Save some Money for Healthcare Needs
Putting side some of your income towards healthcare needs is another great way to reduce payable tax for small businesses. Medical costs will continue to rise, and while you’re healthy now, it’s essential to save money for unexpected future healthcare needs. You can do this by setting up a Health Savings Account (HSA) especially if you’re eligible for high-deductible health plan. The savings come as the triple tax advantage: your contributions are essentially pre-tax, they will grow tax free, and the withdrawals for medical expenses will be tax free.
Make Smart Investments and Purchases
If you’re planning to acquire new equipment or professional services for your business, keep in mind that the timing of these can affect your tax liability for the current or next year. It’s important to plan ahead on what you want to invest in before the end of the year. If it’s towards the end of the year and you’re planning on purchasing an equipment or embarking on a large marketing campaign, it makes more sense tax-wise to prepay some of the costs in order to benefit from the deduction in the current year.
If you happen to keep spare cash for making bigger investments, consider going for tax friendly opportunities. For instance, you can write off a huge portion of your initial investment in areas like oil and gas and real estate. These can help reduce your taxable income because you can take them as active deductions against your earned income. This way, you can generate up to a 5-year return of 30% based on the tax benefits alone.
Change the Structure of your Business
For small business owners, there’s no employer who pays a portion of your taxes. This means that you’re on the hook for the entire amount of Medicare and Social Security taxes. These amounts will only increase the already high tax bill. For businesses taxed under Limited Liability Company (LLC) tax, you still have to pay these taxes.
In some circumstances, you can get rid of the employer portion of these two tax responsibilities. You can consider a number of things in this switch, like paying yourself a reasonable amount as salary, and other related risks. However, it can still be a great way to lower the tax liability for your business.
Keep Records and Books Well
Although you might be using a casual approach towards recordkeeping for your personal taxes, this cannot be done for a business. The tax law actually requires you to have certain records in order to take the deductions. And without these records, some legitimate expenditures might not be deductible. The following are things you need to keep complying with the tax rules:
- Procedures for collecting and storing the necessary receipts and proof of expenditures: You need to have in place a file system to categorize all your receipts such as meals and entertainment costs, car expenses, and capital expenditures.
- A system for tracking expenses and income: This can be done via computer-based record keeping solutions that allow you to handle them by yourself.
- Policies for particular records: For instance, if you’re using a personal vehicle for your business, you should track your business mileage in a log book or diary. If you have staff that you reimburse for business related car expense, you should explain to them how the records have to be kept.
With proper planning and advice, you can significantly reduce your tax payables for your business, and keep your revenues working for you. It’s always wise to consult a tax professional to ensure that you can benefit from the potential tax savings we’ve discussed above.
