Every year, more than 627,000 small business owners face an entirely new challenge: filing taxes for their businesses. While no business owner wants to think about taxes, it’s something that takes planning and, if you’re careful, you may be able to save yourself money.
If you’ve been wondering how to reduce taxable income for your small business this year, don’t panic. It’s easier than you might think. You just need to know where to start.
Here are a few simple ways to help lower your tax liability year after year.
Understand What You’re Responsible For
The types of taxes you’re responsible for paying will vary based on the type and size of your business. Before you start looking for deductions and ways to lower your small business taxes, make sure you know what you have to pay.
For example, if you’re a sole proprietor that sells products, you’ll need to cover the sales tax for each sale you make. If you’re transporting items throughout the city or state, you may have to pay excise taxes.
If you’re not sure which taxes you should be paying and which ones you’re not responsible for, contact an accountant and let them help. They’ll be able to make sure you’re making the right payments and can keep you from having to pay costly late fees when you file.
The fewer fees you have to pay, the more money you’ll end up saving on your taxes each year.
Stay On Top of Your Bookkeeping
The most common cause of business owners overpaying on their taxes is bad bookkeeping. When your records aren’t accurate or up-to-date, it’s hard to know exactly where your profits, losses, and investments go.
This makes it hard to deduct items from your total tax liability.
Start organizing your records immediately. Keep any receipts for business-related purchases, maintain copies of both paid and unpaid invoices, and keep track of your monthly expenses.
When it comes to keeping track of your business’s expenses, the more documentation you can provide your accountant, the better. It doesn’t matter if those documents are digital or paper copies. Choose the system that works best for you and helps you stay organized throughout the year.
Maximize Your Deductions
Every business owner can deduct certain expenses from their total taxable income. If you’re not taking advantage of the fact, you’re overpaying your taxes by what could be thousands of dollars.
Small business deductions can vary depending on the type and size of your business.
The best thing you can do is figure out which ones you can qualify for based on the way you operate your company. Then, speak with an accountant prior to filing your taxes to make sure you’re not missing any deductions.
This will save you money and can dramatically reduce your total taxable income for the year.
Use Your Profits the Right Way
One of the best ways to show your employees that you value their work is also one of the best tax strategies for small business owners: contributing to retirement accounts.
As a business owner, you’re able to contribute money to your employees’ retirement funds up to a certain limit. You’re able to deduct a portion of those contributions from your company’s tax liability at the end of the year.
Just make sure that the types of plans you offer qualify for the tax deductions before you start matching employee contributions.
Keep Track of Travel Costs
It’s normal for business owners to spend money on travel expenses for their business. After all, you need to meet with clients, grow your network, and reach broader markets.
Luckily, a portion of those travel expenses can get deducted from your taxable income. You just need to keep your receipts.
If you travel regularly, start a dedicated folder and keep your receipts, hotel statements, and other related proofs of purchase in it. This way, you’ll know exactly where everything is and can file your taxes more quickly.
Look for Tax Credits
Almost all businesses qualify for tax credits throughout the year. These credits come from the government as an incentive to encourage businesses to do certain things each year.
The types of credits you’ll qualify for depend on what you did or didn’t do throughout the year.
For example, if you’ve taken steps to decrease your business’s carbon footprint by switching to alternative energy sources, you may qualify for a tax credit. If you’ve hired employees or offer paid leave to employees, you may qualify for additional credits.
Buy the Equipment You Need
Did you know that you can deduct the costs of business-related equipment purchases from your total taxable income? You can!
The type of deduction you’re claiming determines how the deductions can get applied. Some allow you to deduct the full amount the year that you buy the equipment. Others allow you to deduct a portion of the cost for several years in a row.
Take Advantage of Your Bonus Structure
One of the best ways to award your employees for their dedication and service is to give them bonuses. It can help inspire loyalty and encourages them to stay with your company for years to come.
However, it’s also one of the best small business tax strategies to reduce income tax for the year.
You’re able to deduct those bonus payments and any financial awards from your taxes at the end of the year. If you give gifts to merchants or clients, those gifts may also qualify.
Now You Know How to Reduce Taxable Income for Your Business
Taxes are something that no small business can escape. You have to pay them or you’ll face costly fines and jeopardize your company’s future.
If you’ve been wondering how to reduce taxable income for your growing small business, keep this guide in mind. By following these tips, you’ll be able to reduce your tax liability year after year.
Looking for more tips to help you streamline your small business’s finances? Check out our latest posts now.