Running a small business and ensuring its consistent growth is a difficult task. As a small business owner, your plate is already filled with several significant jobs, including daily operations, strategic planning, and the occasional spill of coffee. Therefore, it is normal to feel a little more pressure when tax season arrives. Plus, who does not get stressed at the thought of giving the government a sizable portion of their hard-earned money?
There is a bright side, though: taxes don’t have to be the deadly enemy we frequently portray them as. You can handle tax season like it’s any other day at work if you have the proper planning, along with the best practices and tools for managing your spending.
Fortunately, many small business tax deductions are available, designed specifically for the corporate world’s self-employed warriors, prepared to lessen the financial hit that comes with operating a firm. By utilizing these deductions, you can save a larger portion of your earnings.
Before we talk about how to save your business tax, get a quick go-through on the basic definition of tax deductions.
What are Tax Deductions?
A tax deduction is a legally allowed amount that is deducted from one’s income to reduce their taxable income and, consequently, their overall tax liability.
For example, you earned $70,000 this year, and you reduced your taxable income to $50,000 by taking all the permitted deductions. That way, you would only pay taxes on that $50,000, as opposed to the full $70,000.
Generally speaking, your business expenses have to be “ordinary” and “necessary” according to the rules set forth by your local tax authority in order to be eligible for such write-offs. In other words, they must be typical and essential for your field of employment.
For example, buying a camera makes sense for a photographer’s firm, but the same expenditure wouldn’t have much of an impact on a software agency.
Now that we’ve covered small business tax deductions, let’s look at some of the finest strategies for increasing your income while lowering your tax liability.
An Effective Way to Get the Most Money
Deduct travel expenses.
There may be tax savings available to you if you travel for work. While personal travel is not included for the same benefit, business travel is fully deductible. However, small business owners can combine personal travel with a legitimate business objective to optimize their business travel deductions.
You can later use the frequent flyer miles you accrue from work travel on your credit cards to book personal travel. Since personal travel is not deductible and business travel is, you might as well utilize them for your individual trips.
Invest in the retirement plan.
Increasing your retirement account balance benefits your tax rate in addition to being an investment in your future. Because 401(k) contributions are made with pre-tax income, your monthly income drops each pay period, resulting in a lower tax rate.
In a retirement plan, if you do things smartly, you can save a significant amount of money in taxes by
Bank Charges
Keeping your business’s credit cards and bank accounts distinct is usually a good idea. The annual or monthly service costs, transfer fees, and overdraft fees assessed by your bank or credit card issuer are all deductible. Additionally, you can deduct transaction or merchant costs that you have paid to a third-party payment processor like Stripe or PayPal. Fees associated with your individual credit cards or bank accounts are not deductible.
Deduction for home offices
One little but welcome relief is the home office deduction for businesses running out of one’s residence. If you operate your business out of your house, most tax codes permit you to deduct a certain amount of your rent or mortgage, utilities, and other associated costs.
However, in order for the home office deduction to be valid, your workplace needs to meet certain requirements: “Daily and exclusive utilization.” The use of the facility for conducting business must be limited to that purpose. A room has two uses, such as a guest room that occasionally doubles as an office or your child’s playroom, which usually doesn’t qualify for the deduction.
The principal place where work is done should be the workstation. For example, you probably wouldn’t be able to claim the deduction if you work out of a co-working space most of the time and use the kitchen table just sometimes.
Reduce your debt.
Many small business owners borrow money in order to fund their expansion. Although you might be taxed on interest payments, a loan won’t be taxed in the same manner as company income. Consult an accountant or CPA to determine if you can afford the loan.
Many small business owners borrow money in order to fund their expansion. Although you might be taxed on interest payments, a loan won’t be taxed in the same manner as company income. To find out if you may make your loan as tax-efficient as feasible, speak with a CPA or accountant.
Make sure to write off any uncollectible debts you may have accrued throughout the year at the same time. Debts that a consumer owes your company but that you, the owner, or a creditor have not been able to collect are known as uncollectible or bad debts.
Hire a family member.
Hiring a family member is one of the finest strategies to lower your small business’s taxes. Many options are available through the Internal Revenue Service (IRS), all of which have the ability to shield income from taxes.
If your company is a sole proprietorship, for instance, you are able to employ your spouse and give them a salary. As long as they are a real employee and not a partner in the business, their income will be subject to federal income tax as well as Federal Insurance Contributions Act (FICA) taxes for Social Security and Medicare, but not federal unemployment tax (FUTA).
Save money on medical expenses.
Setting aside money for your future medical expenses is another smart strategy to lower your small business taxes. Even though you may be healthy right now, having some extra cash on hand for medical bills could be a lifesaver if medical costs continue to rise. If you have a qualified high-deductible health plan, you can do this through a Health Savings Account (HSA).
Furthermore, you can frequently deduct the cost of your health insurance premiums for yourself, your spouse, if you have one, and your children up to the age of 27 if you work for yourself.
Use the Surlus Funds for marketing.
Compared to traditional approaches, digital marketing reaches a much larger audience. Digital marketing-related costs are all tax-deductible. Any extra money you have at the end of the year can be used toward tax savings by using it for startup marketing and advertising. Additionally, as digital marketing reaches out to a new consumer base more quickly, it is done through these channels.
Inventory Valuation.
Stock is normally valued at cost, but if it has a short shelf life, it must be evaluated using the less expensive of the two principles: cost or net present value. By keeping the stock from being overvalued, NRV lowers taxes. To prevent drawing the unwanted notice of income tax authorities, this practice must be maintained.
Donation.
Giving money away has tax advantages in addition to the satisfaction of performing a good deed. Donations to recognized charities and funds are required to deduct taxes. In order to receive tax benefits, you can also donate to recognized NGOs and charities.
Summing Up.
For small business owners who file, prepare, and pay their own taxes, tax season is a difficult time of year. Follow these tax-saving strategies to get ready for tax season. The best time to begin planning is right now.