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Legally Pay Less: How to Reduce Taxable Income For Your Small Business

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reducing tax liability

Every year, more than 627,000 small business owners face a new challenge: filing taxes for their businesses. While no business owner wants to think about taxes, it 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 will vary based on the type and size of your business. Before 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 selling products, you must cover the sales tax for each sale. If transporting items throughout the city or state, you may have to pay excise taxes.

Additionally if your business has an office offshore, such as in Hong Kong, contact an accountant ideally a CPA and legal advisors to ensure compliance with relevant laws and regulations. You’ll need to consider tax jurisdiction, transfer pricing, tax treaties and foreign reporting requirements.

The fewer fees you pay, the more you’ll save on your taxes each year.

Stay On Top of Your Bookkeeping

Bad bookkeeping is the most common cause of business owners overpaying their taxes. 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 receipts for business-related purchases, maintain copies of paid and unpaid invoices, and keep track of your monthly expenses.

When 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 how you operate your company. Then, speak to an accountant before filing your taxes to ensure you’re not missing any deductions.

This will save you money and 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 can contribute money to your employees’ retirement funds up to a specific limit. You can deduct a portion of those contributions from your company’s tax liability at the end of the year.

Just make sure that the 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 must meet with clients, grow your network, and reach broader markets.

Some of those travel expenses can be 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. 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 to incentivise companies 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 decreased your business’s carbon footprint by switching to alternative energy sources, you may qualify for a tax credit. If you’ve hired employees or offered paid leave to employees, you may be eligible for additional credits.

Buy the Equipment You Need

Did you know you can deduct business-related equipment purchase costs from your total taxable income? You can!

The type of deduction you claim determines how the assumptions can be applied. Some allow you to deduct the total amount the year you buy the equipment. Others allow you to remove a portion of the cost for several years.

Managing Payroll

Managing payroll to minimize income tax liabilities is a valid exercise. However, it requires careful consideration of tax laws and regulations.

Therefore, ensuring compliance with legal requirements is essential while taking advantage of available deductions and credits. Some of the strategies your business may want to consider to manage payroll and potentially reduce income tax liability include:

  • Salary structuring
  • Tax-advantage benefits, e.g., health insurance, retirement plans
  • Tax credits, e.g., for hiring specific groups of individuals
  • Employee stock options for favorable tax treatment
  • Tax-exempt fringe benefits, e.g., car parking, transportation, or meals

Plus there are many more options, like paying bonuses instead of higher salaries. It’s crucial to note that tax laws vary by jurisdiction, and what works in one location may not be applicable elsewhere.

Businesses should consult with tax professionals or accountants familiar with local regulations to develop a payroll strategy that aligns with legal requirements and the company’s financial goals.

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 encourage them to stay with your company for years.

However, it’s also one of the best small business tax strategies to reduce income tax for the year.

You can 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 face costly fines, jeopardizing 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 can 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.

Finally, if you’re unsure which taxes you should be paying and which ones you’re not responsible for, contact a CPA accountant and let them help. They’ll be able to make sure you’re making the proper payments and can keep you from having to pay costly late fees when you file.

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