We’re always looking for ways to reduce the amount of tax we pay. Businesses were hit so hard during the COVID-19 pandemic, and many had to pivot and make changes that wouldn’t have initially been on the horizon for them. You likely wear many hats, and the last thing you want to do is give more of your hard-earned business income to the government.
Any reduction in tax that you can find will be vital for their survival. Even the IRS acknowledges that you must keep some money to live on and run your enterprise. Minimizing taxes may be the difference between a profitable business and one that is just scraping by.
Like timing income and expenses, some small businesses must accomplish tax savings strategies before the end of the tax year. But others, such as funding a retirement plan, can be done at any time before you file your tax return.
Different Ways We Can Reduce Your Tax
- Tax credits are the federal government’s way of encouraging businesses and individuals to do things—or not do something—that affect the greater good. You can take tax credits for hiring employees, going green, providing access to disabled employees and the public, and providing health coverage for employees.
- Businesses can take tax write-offs on business equipment, machinery, vehicles, and sometimes even real estate. These write-offs can sometimes be taken in the first year you own and use the equipment.
- You can deduct up to $25 per person from the cost of gifts given to customers and vendors. An exception exists for those that bear your business name, are distributed as a matter of course, and cost less than $4.
- Timing your income involves moving it from one year to another. You first have to determine the year in which you expect to pay the most in taxes. Review your current expenses before the end of each year and prepay some of those amounts if you want to reduce your income for the current year. You can also increase your expenses and decrease payment by making expenditures such as stocking up on supplies.
Review Your Accounts
- The end of the year is also the time to review your customer accounts if your business operates on the accrual accounting method. First, find those customers who aren’t likely to pay you. You can write off the amounts they owe as “bad debts” and deduct them from your business income to save on taxes. Bad debts can also include loans made to clients, vendors, or employees who don’t pay you back.
- Consult a tax professional before making any decisions that can affect your business tax return or spending money for the sole purpose of saving on taxes. Make sure you select someone who can help you all year, not just at tax time. Consider hiring an expert who can represent you before the IRS in case you ever get audited.
- Keeping track of your spending is easier than ever these days, but it can still seem daunting to some. Most credit cards will send you a year in review, and all of your bank transactions are available online. While online banking has made things a lot easier, there is still plenty of room to miss something. Use accounting software like Quickbooks to make things easier for you.
- Too many people who work from home are afraid of taking the home office deduction. If you work from home, at least look at if you qualify for this tax deduction. You may be surprised by how much money you can save.
Wise Planning
With wise planning, you can reduce your taxable income as a small business owner and keep more of your money working for you. Just remember to consult a tax professional to make sure you qualify for the potential savings discussed here. Contact us today to find out how we can help you and also what tax credits might be available for you.
