For small business owners, every dollar counts. Whether it’s increasing sales, adding a new product, or cutting down on spending, I’m sure you’re looking for any way to cut costs and increase profits. At the end of the day, profits and cash flow are the fuel that drives the long-term sustainability of any great business.
However, few expenses cause more eye rolls than your annual tax bill.
No one typically likes to deal with, never mind understand taxes. Unfortunately, no matter your views on them, as the saying goes, there are only two certainties in life “death and taxes.” So rather than grumbling, it’s important to understand how you can inject some knowledge into your tax planning abilities. To assist, below are 10 essential tax tips that small business owners can use to help with tax planning and get even more out of their businesses.
1. Set up a business expense account
One of the most common tips that you’ll hear around tax time is to get receipts for everything and keep the most accurate records that you can. While this sounds good in theory, it’s much harder than you think to not only remember a receipt every time you make a purchase but to ensure you keep every receipt throughout the year. Each receipt that goes missing or is forgotten is an expense that could make it more difficult to claim. So how can you track these expenses that you can claim?
By setting up a dedicated business account. For starters, many of the major banks (and some of the smaller ones) will offer accounts and services specifically designed for small business owners just like you. With these accounts, you’ll most likely receive a dedicated card that you can use for your business-related purchases. You can then most likely use your statement and transaction history for reference of expenses that you hope to claim.
Accurate records can often mean the difference between a small or large tax bill, and opening a dedicated business account should help.
2. Set up a retirement account for your business
Investing in your future or the future of your employees is a simple way to save money on your annual bill. By offering a retirement plan for your staff, or setting up a retirement account for yourself, you can seek to cut down your taxable income today.
For business owners that are sole proprietors, you can look to open a Solo 401(K). If you have multiple employees, you can look to start a 401k plan for you and your staff.
There are rules and regulations surrounding this, including contribution limits, the use of pre or post-tax money, and employer matching to think through.
However, this can be a great way to obtain tax benefits today, while contributing to your and your employees’ futures! Who would’ve thought that tax planning could benefit you now and later down the line?
3. Give back to your local community
Donations to charity could be claimed as a deduction. Yes, you read that correctly - it pays to give back to your community. There are several paths that you can use, so I’ll leave you to decide where you choose to donate. One helpful tip is to give less frequent donations of larger amounts, or “stack” your donations. Giving more frequent smaller donations could mean you are leaving some tax planning dollars out of your pocket.
4. Hire your family members
Wages are tax deductible but as a small business, it can be hard to justify bringing more people on board. The good news is that if you have a family, you have people in your life that you can ‘pay’ wages to. You simply need to hire them, assign them business-relevant tasks, and pay them appropriately for their time.
This, of course, needs to be done within reason. For example, you probably shouldn’t hire your 7-year-old. You can, however, hire your spouse and your teenage children. This means that you can save on tax while providing income for them. You can even do this for your retired parents. Think about it - we gift money to our families in various ways, but simply giving them cash gives you no benefits. By assigning them business-related tasks and processing payments through your payroll instead, you can give them the money you usually would and benefit from a reduction in your business taxes.
The key is to keep everything above board by giving relevant tasks and paying a fair wage. If your teenager helps you with cleaning and you pay them a 6-figure salary, this may raise a few eyebrows. Furthermore, this salary will come with a sizeable tax bill for your teenager. Common sense goes a long way here.
5. Invest in a business location
While renting a business location may be helpful now, you could be costing yourself in the long term. Purchasing a building can help to decrease your tax bill and increase the net worth of your business in the future. Firstly, you can look to deduct the expense of your business location from your taxable income. Secondly, the value of the building could increase over time, and become an asset for your business in the future.
6. Ensure your business is correctly classified
The classification of your business will determine how your tax is calculated. If you’re a sole proprietor (or sole proprietorship), your business is typically taxed as a flow-through entity to your individual returns, so your bill is calculated using your name, revenue, and deductions as part of your personal tax return. Single-member LLCs are taxed in the same way.
Multi-member LLCs can choose to be taxed as a C-Corp would (tax is paid on company revenue and any income and dividends received by shareholders), as a partnership, or a S-Corp, where your tax is calculated as part of your personal income tax return.
Different structures will suit different businesses, so it’s important to understand the various classifications with the assistance of good legal counsel and a CPA as to what would benefit your business the most.
7. Donate your old and unused business equipment
Getting new business equipment is great. You get new tools and tech that you can use for your business, and you can look to claim the cost of these items back at tax time. The question is, what do you do with the equipment that you’re trying to replace? Just throw it out or let it gather dust in storage?
Why not, instead, donate it for a tax credit? (and to help the community of course). When donating to a nonprofit, you may be able to claim the fair value of your old equipment back as a deduction. If it’s not in good enough condition to donate, you may be able to claim back the loss of getting rid of it. This is your invitation to make some upgrades to your office equipment!
8. Make the most of QBI Deductions
The Qualified business income deduction is designed to benefit the self-employed and small business owners. If you’re eligible, you may be able to deduct 20% of your business income from your taxes. In short, it may allow you to significantly reduce the income tax that you would need to pay.
There are certain criteria that you need to meet, but if you qualify, you could be in for some nice savings.
9. Make use of section 179
Assets are essential for some businesses, but they do often depreciate in value. The good news is that under section 179, you may be able to deduct a significant portion of a fixed asset purchase right away instead of capitalizing it and then depreciating it over time.
10. Get help
If you haven’t gathered already, tax planning can be incredibly complicated. Trying to stay ahead of the latest legislation, understanding what you can claim, and preparing your annual tax return is frankly, a full-time job. This is literally what countless people around the world do for a living. Trying to juggle this, the success of your business, and the growth of your personal wealth may seem possible. However, sticking to your core competencies, while obtaining expertise on the rest typically works out best.
As one of my life heroes, Charlie Munger states, “Knowing what you don’t know is more useful than being brilliant.”
Getting help from a Wealth Advisory Company that can help liaise directly with your qualified CPA is a proven way to maximize your tax return, grow your personal wealth, and help ensure the success of your business. No one achieves success on their own. Even Tom Brady, the greatest of all time, needs someone to throw a perfect pass to.
Navigating the minefield of business tax can be tricky. However, with the right knowledge, and people in your corner, you can look to limit your stress and maximize your returns at tax time.
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