Ben Franklin said two things are certain in life—death and taxes. While there’s no escaping death, you can sidestep some taxes if your business takes preventive measures. Make a mistake and your tax bill grows. But if you plan ahead, take the right deductions, and prepare returns properly, you can save a bundle on the taxes your business must pay. Here are seven tips to help reduce your tax liability.
Keep Current With Tax Law Changes
When it comes to the tax law, the one thing that’s constant is change. New legislation and IRS rulings happen all year, presenting opportunities if you know to act on time. Waiting until the annual meeting with your accountant may be too late to take advantage of these opportunities.
Structure Your Business Right
This is one of the most overlooked aspects in tax planning. Many businesses start out small and don’t change the structure of their business when they should. A closely held company that has income passing through to the owner is usually set up as an LLC or an S corporation. While there is nothing wrong with that approach, you might be able to gain tax advantages by structuring your company as a C corporation. With a C corporation, the first $50,000 of your income is taxed at a rate of 15 percent as opposed to a 35 percent rate if you’re in the highest tax bracket.
Add Employee Benefits Instead Of Raises
Compensate yourself and your employees with a boost in benefits instead of salary and you’ll save FICA, unemployment, income, and Medicare taxes on those wages. Both the employer and the employee saves.
Adopt An “Accountable Plan”
If you reimburse employees for using their vehicles, adopting an accountable plan will save them income taxes and save the company payroll taxes. This arrangement lets you reimburse an employee for business expenses without having to treat the reimbursements as income to them. Result: the reimbursements are not included in the employees’ W-2 form (the employees are not taxed on the reimbursements) and the company saves payroll taxes (FICA and unemployment taxes) on these amounts.
Take Advantage Of Section 179
Section 179 of the IRS code allows businesses to deduct the full purchase price of equipment and software up to $1 million instead of the usual seven year depreciation. It makes sense to accelerate a purchase you’re already planning in order to get the year-end deduction now.
Track Your Carryover Tax Deductions
Deductions for things like capital losses, net operating losses, home office deduction or large charitable donations are just a few deductions or credits that can be carried over into a future year when not fully used in one year.
Don’t Forget About Retirement Plans
One of the easiest ways for business owners to reduce their personal taxable income is through retirement plan contributions. If your business is profitable, you can shelter income in a qualified retirement plan and defer tax on earnings.