If you think that your small business is paying more taxes than what is necessary, you are not alone. Taxes can be pretty stressful, especially for a small business owner. Since you are just beginning to make a mark in the industry, the last thing you want is to pay more of your hard-earned money to the government! Fair enough! Whatever kind of business you have, you can expect a considerable amount of deductions to lower your liability, thereby allowing you to invest those dollars in your business and employees. If you are looking for ways to lower small business taxes, consider few of the following methods.
Claim the deduction of home office
Claim the deduction if you are using your house for business. In fact, it is easy to do so now as IRS has introduced a simple claim method with which it is possible to claim $5 per square feet and up to 300 square feet of home office space. The regular method, on the other hand, needs more record keeping in the year as it is based on the real and actual expenses such as rent, utilities, home repairs, mortgage, etc. IRS Form 8829 can be used to understand the actual calculation as it will help in a big way to lower small business taxes.
Do not overlook travel and entertainment expenses
Most small businesses ignore or tend to overlook entertainment and travel expenses. The costs of all trips involving business can be deducted. For example, the cost incurred in taking a client for dinner, traveling to seminar or tradeshow can be deducted.
Don’t forget insurance
One of the very commonly overlooked deduction is business insurance premiums. The IRS allows companies to deduct property, malpractice, general liability, contributions to state unemployment insurance, medical insurance premiums, and life insurance apart from others. Apart from that, on contribution towards employee’s health care premiums, you even qualify for a business health care tax credit.
Change the structure of your business
Since you own your small business, you have to pay the entire Social Security and Medicare taxes. This will only add to the already existing high tax bill. Even if your business comes under Limited Liability Company (LLC), the taxes still need to be paid. In some situations, it is possible to get rid of the employer half of those two tax responsibilities. The switch involves many things like getting yourself paid a reasonable salary and other associated risks. Moreover, it can be a great way to minimize your taxable responsibility.
Hire a competent accountant to lower your small business taxes
A good accountant can add value to your business in more than one way. An accountant can keep you away from trouble with the IRS. Even though you might feel like hiring an accountant is expensive, focus on the profit that a competent accountant can bring to your business in the long run and in the process will also help lower small business taxes.
Do not mix personal and business
Keep your business and personal expense separate. Intermingling both can prove very confusing during tax season. Whether it is a separate bank account or credit card, keep everything separate and also have a track of all that goes in and out of your business.
How to avoid IRS audit?
Listed below are few ways in which you can avoid an IRS audit:
Understand equipment and supply difference
Since supplies are utilized and replaced all year through, it can easily be deducted. , on the other hand, is higher value items with longer life, similar to computers. You can either take a 100 percent deduction beforehand or depreciate the cost over five years.
Even though you can deduct client gift costs, it is possible to only claim the first $25 for each gift. Check out IRS Form 463 for more detail.
Manual filing also triggers an audit since it is more prone to mistakes and gives the impression that you are perhaps trying to hide something. IRS and state revenue offices prefer online filing since they are less prone to mistakes. In fact, it is mandatory in some states.
Meet your deadline
Do not delay and miss your deadline as it causes suspicion. Further, you can avoid late fees and penalties.
Donate and engage in charity
Tax incentives are provided by the IRS for donations and so go ahead and utilize it. Always make sure that the charity that you wish to donate to is qualified and donations are tax-deductible. The IRS will want you to have a written acknowledgment from the charity for any contribution amounting to $250 or more.
Take advantage of the welfare-to-work tax credit
Firms that qualify to participate in the Work Opportunity Tax Credit (WOTC) program are eligible for a reduction of their federal tax liability up to $2,400 per hire. The WOTC program echoes the “Welfare-to-Work” federal tax credit. They are incentives that support and encourages the hiring of persons from specific groups that have very high unemployment rate or even special employment needs (veterans, ex-felons, and high-risk youth).
Businesses and firms that hire under this category of the WOTC can bring down their federal tax liability up to a whopping $9,000 over two years for all qualified new employee.
Begin a retirement plan
Another helpful way to lower your small business taxes is to begin one retirement account options that maximize retirement savings, thereby reaping huge tax benefits. In the case of the Individual 401(k), the IRS allows you to keep up to $53,000 away for retirement. Few of the retirement planning programs include SEP IRA, SIMPLE IRA, and Independent 401(k).
Even though there are many more, the above-mentioned techniques can certainly help you lower small business taxes. Always bear in mind to speak with a tax professional before you act on any of the listed suggestions.