Taxes can be stressful for a business owner. You wear many hats, juggle many balls, and the last thing you want to do is give any more of your hard-earned revenue to the IRS than you need to. Thankfully, there are many tax savings strategies to reduce your taxable liability. Here are 7 Ways For Business Owners to Reduce Their Taxable Income.
Employ Family Member
One of the best ways to reduce taxes for your small business is by hiring a family member. You can even hire your children. The IRS offers many options, all with the potential benefit of sheltering income from taxes. However, please make sure that the payment to the child is for work the child actually performed.
Review How Your Business Is Set Up
What is the corporate structure of your business? Are you a sole proprietor, S-Corp, LLC, Partnership, or C-Corp? As your business and income grows, the best structure for your business may change. Therefore, your entity is something you should review with your Enrolled Agent.
Claim Bonus Depreciation
You likely purchased computers, equipment, furniture, and other assets for your business that you will use over several years. Typically, the tax code requires you to depreciate those items over their useful life. But bonus depreciation allows you to write off 100 percent of those costs on your 2021 income tax return. If you’re considering buying a new piece of equipment, upgrading your technology, or making some tenant improvements, consider doing so before December 31. Caution — not all assets qualify for bonus depreciation.
Postpone Income and Accelerate Expenses
Using cash basis accounting for tax purposes creates some valuable tax planning opportunities. Under the cash method, you recognize income when received and expenses when they’re paid. So, if you want to lower this year’s tax bill, consider whether you can push this year’s income to next year or accelerate next year’s expenses to this year.
Establish a Tax-Favored Retirement Plan (if you don’t already have one).
If your business doesn’t already have a retirement plan set up to benefit you. Current retirement plan rules allow for significant deductible contributions. However, thanks to a change made by the 2019 SECURE Act, tax-favored qualified employee retirement plans, except for SIMPLE-IRA plans, can now be adopted by the due date (including any extension) of the employer’s federal income tax return for the adoption year. The plan can then receive deductible employer contributions made by the due date (including any extension), and the employer can deduct those contributions on the return for the adoption year. Discuss this with your financial planner.
Give to Charity
Charitable contributions aren’t typically deductible on small business tax returns — only on the returns of C corporations. But the tax benefit of those contributions doesn’t disappear. Instead, they pass through to the business owner’s individual tax return.
Contribute To an HSA
Health savings accounts (HSAs) are accounts that let people with high-deductible health plans (HDHPs) save on out-of-pocket medical expenses in a tax-advantaged account. Contributions to an HSA are tax-deductible, the money grows tax-free while in the account, and withdrawals are tax-free as long as you use them to pay for qualifying health care expenses.
We hope the 7 Ways For Business Owners to Reduce Their Taxable Income was helpful. Every business and individual tax situation is unique, and deciding whether these tax strategies are right for you can be confusing. If you need help, be sure to reach out to us at 772-337-1040.
