13 Ways Small Businesses Can Lower Their Tax Liability
All business owners want a thriving business that grows consistently and offers steady profits. Tax preparedness is key to this. Businesses are required to pay taxes on their profits but there are ways to reduce their tax liability so that more funds are available to be re-invested into the business, thus helping it grow further.
Tax liability is the total amount of taxes a business must pay to the IRS. Taxes are calculated based on the profit a business makes. Expenses such as payroll or the purchase of equipment for your business are deducted from your revenue. Thus, the more expenses your business shows, the lower its tax liability.
The tax code recognizes several expenses a business can claim to lower its tax liability. Sometimes, however, business owners are unaware of the possibilities available to them. With the help of a professional bookkeeping service, a small business can ensure tax compliance, make the most of the expenses, and pay fewer taxes.
1. Time Your Payments Wisely
Planning your expenses in time is always a good idea, perhaps even as early as the beginning of the financial year. For example, if you wish to increase your marketing expenses, you may pay the entire cost upfront to include the expense in the current tax year.
Conversely, you could move up your timeline for certain expenses you planned for the next year if it is late in the financial year and need to lower your tax liability. Subscriptions, marketing, advertising, or even purchasing business material and equipment can be brought forward and counted against the current tax year.
2. Increase Retirement Plan Contributions
To lower your tax liability in a way that helps you boost employee satisfaction, you may increase the retirement plan contributions for yourself and your employees.
By making the maximum deductible contribution for the current tax year, you will lower your taxable income, which means you get to pay a lower tax.
If your business has no retirement plan, perhaps you could start one for your employees. There are several plans available that benefit your employees while lowering your taxable income and making your business more attractive to potential employees.
If you are just starting a retirement plan for your small business, you could also benefit from a tax credit of up to $5,000 for the cost of setting up, organizing, and learning about retirement plans.
3. Pay for Health Insurance for Yourself and Your Employees
Health insurance is crucial. Businesses that offer their employees health insurance are more attractive to employees and workers. Naturally, employees appreciate health insurance, and the higher the coverage, the happier the employees. This helps you retain employees and lower your turnover rate.
You can set up a Health Savings Account (HSA) if you offer high-deductible health plans. HSA contributions are pre-tax, and withdrawals are tax-free as long as they are used to cover medical expenses.
Sometimes, business owners and employers think a wage raise is better than an HSA or health insurance plan. However, salary raises are taxable, so your employee will lose part of the extra salary. Likewise, employers pay FICA taxes based on the level of their employees’ wages. The higher the salaries, the more you will pay in FICA taxes.
This often makes a more generous health insurance plan a better option for both employees and your company.
4. Home Office Deduction
If the recent pandemic taught us anything, it’s this: homes can quickly become offices.
If you are one of the millions working from home, either full-time or part-time, you can benefit from a home office deduction as long as you have a whole part of your home dedicated to work and seeing customers. This area can be a room, the basement, an outbuilding attached to your home, or any other building structure you use regularly and exclusively for work.
If this space in your home functions as your primary business location, you can qualify for the home office deduction, which reduces your taxable income. A percentage of your mortgage, bills, utilities and other home-related expenses can be legally deducted.
5. Deduct Your Car Expenses
You may deduct part of these expenses if you use your car to go to business meetings and other work-related activities. You may either deduct costs based on your car’s mileage or include car-related expenses such as gas, auto repairs, taxes, etc.
If you use your car for personal and business affairs, keep track of the mileage you cover for your business travels. You may not deduct the total cost of car ownership—only the percentage that covers business-related transportation. For example, you can deduct the expense of going to a client meeting but not the expense of picking up your children from school.
6. Employ a Family Member
Did you know that employing a family member is a common small business tax-saving strategy? If you have a family member who can work and offer their services to your business, you can legally employ them.
For example, if you hire your spouse, you do not have to pay unemployment taxes, which stand at 6% of the salary. In addition, hiring your children saves you from paying FICA taxes for Social Security and Medicare, which stand at 7.65%.
7. Include Travel Expenses
Travel expenses can easily lower your taxable income. If you attend a conference for business purposes, you should keep all receipts from the hotel, transportation, and even your meals.
If your employees are going on a business-related trip, remind them to save all receipts. You can then reimburse them for their expenses and deduct these from your taxable income.
8. Adopt the Right Business Structure for You
There are various business structures to fit your company and work philosophy. You can, for example, be a sole proprietor—i.e., self-employed, a limited liability company, or a partnership.
The business structure plays a significant role in determining your tax liability. For instance, a limited liability company (LLC) does not pay the employer part of the FICA taxes. This significantly lowers your tax burden.
9. Charitable Contributions
If you have charitable causes that are close to your heart, you can make contributions that are deductible from your taxable income.
Charitable contributions are a great way to make a difference in your community and gain visibility. People always relate positively to businesses that donate to local causes, such as the local school or library, to upgrade the local playground or purchase new books.
It is thus no surprise that philanthropic efforts are a common tax-saving strategy that lets a small business qualify for tax write-offs while increasing sales.
10. Hire Freelancers
When you hire freelancers, you do not have to pay any Social Security or Medicare on their bills. Contractors invoice your business for their work; the full invoice is deductible from your taxable income.
If you want some work done that does not require the presence of a full-time employee on-site, consider contractors or freelancers. This increases your business expenses and lowers your tax liability without adding to your payroll taxes.
11. Apply for Tax Credits
You can benefit from various tax credits, with multiple programs offering businesses tax credits.
For instance, tax credits may be available for hiring older people or people with disabilities. There may also be tax credits for initiating a retirement plan in your small business, taking environmentally friendly initiatives such as recycling and no-waste campaigns, and more.
Tax credits lower the total amount of taxes you have to pay, thus providing you with extra funds to invest in your business. If you aren’t sure what tax credits your business may qualify for, visit IRS.gov or ask your tax preparer what credits they think you may qualify for.
12. Depreciation Deductions
You may benefit from depreciation deductions if you plan on investing in your business with new equipment, tools, materials, company cars, etc. Under specific circumstances, you can deduct the total cost of your investment during the year of the purchase.
This instantly decreases your taxable income and lowers your business’s final tax. This is also a smart way to invest extra income at the end of the year, as it helps give you yet another deduction for tax season.
13. Use Accountable Plans
You can set up an accountable plan whereby you reimburse your employees for any business-related expenses they incur. Common examples include employees who use their cars for business or buy dinner for a client.
The employees keep the receipts from their expenses and get reimbursed for the part of the expense that qualifies as a business expense.
Such reimbursements are not considered employee income. Since FICA taxes (Social Security and Medicare) are calculated on the employee’s income, reimbursements do not incur any payroll taxation.
Trust Remote Quality Bookkeeping for Your Tax Liability
A professional and knowledgeable bookkeeping company like Remote Quality Bookkeeping will keep track of your expenses and show you how you can lower your taxable income and make the most of the available tax credits, accountable plans, depreciation, charitable contributions, health insurance, and retirement plans.
You have support throughout the financial year when you hire a bookkeeping service. You do not have to stress over the tax season, leaving it until the last moment to file your taxes. Focus on your core strengths by trusting us to work on ours!
Start your free trial, or call us at 866-567-4258 to talk to a bookkeeping specialist and have our full support and financial advice concerning your taxes, inventory, and accounts. Small business accounting doesn’t have to cause stress—we’re here to help.