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SMALL BUSINESS TAX PLANNING

February 28, 2020 10:44 pm Published by Leave your thoughts

If you’re a business owner, then tax season can bring on a whole new set of tax-related challenges. Fortunately, there are a number of valuable tax filing strategies to maximize credits and deductions that can benefit a business owner.

The federal government levies four basic types of business taxes: income taxself-employment tax, taxes for employers, and excise taxes. The IRS has a helpful Guide to Business Taxes that provides information on each of these taxes.

Many small business owners find comfort in working with a CPA or qualified tax professional. But if you feel comfortable enough to prepare your taxes on your own, then there are several great filing strategies to maximize credits and deductions that you’ll want to be aware of.

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8 Tax Filing Strategies

  • Claim the health care tax credit.
  • Deduct certain property.
  • Deduct charitable contributions. 
  • Pay attention to miscellaneous deductions. 
  • Claim the work opportunity tax credit. 
  • Claim a credit if your business provides child care expenses.
  • Claim the pension plans startup cost credit. 
  • Deduct health care premiums.

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If you need ways to reduce your taxable income this year, consider some of the following methods below.

Employ a Family Member

One of the best ways to reduce taxes for your small business is by hiring a family member. The Internal Revenue Service (IRS) allows for a variety of options, all with the potential benefit of sheltering income from taxes. You can even hire your children.

Start a Retirement Plan

As a small business owner, you give up a 401(k) match matched by an employer. However, there are several retirement account options that maximize retirement savings and reap valuable tax benefits. 

Save Money for Healthcare Needs

One of the best ways to reduce small business taxes is by putting aside money for healthcare needs. Medical costs continue to increase, and while you may be healthy now, saving money for unexpected or future healthcare needs is essential.

Change Your Business Structure

As a small business owner, you don’t have the benefit of an employer paying a portion of your taxes. You’re on the hook for the entire amount of Social Security and Medicare taxes. If your business is taxed as a Limited Liability Company (LLC), you still have to pay those taxes, though in certain circumstances you may be able to eliminate the employer-half of those two tax responsibilities. This might be a wise switch for some small businesses. While there are many things to consider in this switch, such as paying yourself a reasonable salary and other associated risks, it can be a good way to reduce your taxable responsibility.

Deduct Travel Expenses

If you travel a lot, you may be able to reduce your business taxes. Business travel is fully deductible, though personal travel does not enjoy the same benefit. 

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Top Tax Deductions for Small Business Owners

As a small business owner, there are many ways you can save thanks to the “ordinary and necessary” rule. The IRS allows deductions on items that are considered ordinary for your business, meaning common or expected in your industry or type of business, and necessary in terms of being helpful and appropriate for your business.  

1. Home Office

Today, many people have a home office that they use for running a business. If this is the case for your small business, you have the opportunity to deduct expenses related to your home office. 

2. Advertising and Marketing

Advertising and marketing are essential to the success of any business.  Common examples include business cards, direct mail letters, billboard advertising, and online advertising

3. Office Supplies

Even if you don’t purchase many supplies throughout the year, keep track of those that you do. Think about things such as:

  • Paper
  • Pens and pencils
  • Stamps
  • Envelopes
  • Post-it notes

4. Vehicle Use

If you use your vehicle for business purposes, there are two ways to claim a deduction:

  • IRS standard mileage rate
  • Keep track of all vehicle-related expenses

5. Travel

Even if you work at home, there may be times when you’ll travel to meet clients and prospects or attend conferences. This positions you to deduct a variety of expenses, such as:

  • Rental cars
  • Airline tickets
  • Hotels
  • Food
  • Entertaining colleagues

6. Insurance

When operating a business, having insurance is crucial because you want to be protected for any risk that could come your way. 

7. Repairs 

Broken toilets, leaky faucets, and other damaged items in your business are unpleasant to deal with and can throw a major wrench in your day. The pleasant upside of having to perform or pay for repairs within your small business is that if the repair is ordinary, the expense is fully deductible.  

The best way to take advantage of deductions is to stay organized throughout the year and store receipts and other important documents in a safe place so you can be more prepared when tax season approaches.

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