Even though paying taxes is inevitable, your small business shouldn’t be paying more in taxes than your fair share. There’s no need to resort to tricks, either. There are plenty of legitimate ways to reduce your small business taxes.
1. Monitor Your Adjusted Gross Income
As a small business owner, you have total control over your adjusted gross income, or AGI. Since there are lots of tax breaks and limitations that disappear after a certain number, it pays to closely monitor your adjusted gross income as the year goes on. For best results, don’t wait until March to look at your AGI. Keep tabs on it starting now.
2. Take Losses Rather Than Gains
If you have older office equipment or a business vehicle that has seen better days, don’t sell it off. The nominal amount of money you get from such a sale is considered a taxable gain. Instead, find a charitable organization to donate it to, and take the charitable donations as business credits on your small business tax return.
3. Pay January Bills in December
If you’re an S-Corp with S-Corp filings, everything you have in your business checking account on December 31 is considered income, and is carried over onto your personal return, too. Instead of spending that profit and potentially being tapped out in the early part of the following year, use that money to get a head start on next year’s bills. Pay January’s bills in December. As long as the check is dated in December, you’ll be able to reduce your profit and pay less on your business—and personal—return.
4. Use a Retirement Plan as a Tax Shelter
Another way to save profits from being taxed at the end of the year is to make a retirement plan contribution. As long as you do so by March 15th of the tax year, you’ll be able to reduce your profit and pay less tax.
5. Reconsider Your Business Structure
When you first started your small business, you may not have considered all the alternatives for structuring the company. In addition, your small business may have grown substantially, and it might make sense to reorganize under a different business structure. Check in with a legal counsel to ensure that your structure is allowing you to take advantage of all possible tax breaks. If it isn’t, it’s worth considering a business structure reorganization.
6. Extract Pre-Tax Dollars
There are lots of deductions that small business owners can take that make profits lower and thus reduce taxes. When you use your small business entity to extra these pre-tax dollars, more money ends up in your pocket. Some ideas include setting up a home office. Even if you have a separate business location, you are still allowed to have a second, home office. Then you can deduct that portion of your home mortgage payment from your business profits. Another idea is to have a business vehicle, where the company pays for the vehicle lease, and all fees and maintenance costs associated with it.
7. Hire Outside Experts
Anytime you hire someone to do some of the work for you, that’s an expense that can be deducted on your business return. Consider hiring a bookkeeping service, a tax expert and even an office cleaning crew. Those monthly service fees all add up, and reduce your year-end tax obligation!
8. Turn Salaries Into Contract Work
Even though payroll is deductible, your small business has to pay FICA and match Medicare and social security payments. This adds up quickly over the year. A better way is to use independent contractors. This turns all your outsourced work into expenses, which are deductible on your tax return.
9. Open a Health Savings Account
A health savings account isn’t to be confused with health insurance. Health savings accounts are to be used exclusively for expenses that aren’t covered by typical health insurance, such as over the counter medicine, deductibles, and certain medical devices, such as crutches or bed trays. Every penny put into a health savings account is a deductible small business expense, while the money will get used to help you and your family live healthier. This tax reduction for small business entities is powerful, yet rarely used.
10. Plan Ahead
Hire a tax planner to help get a handle on your small business taxes and tax deadlines. Tax advise professionals say that the time to make plans and take action is a the beginning of the year, so consider hiring a small business tax advisor now to be ready for next year’s taxes.