Albert Einstein once said, “the hardest thing to understand in the world is the income tax.” Therefore, it is understandable why 9 out of 10 small business owners overpay on their taxes. The US tax code is roughly 70,000 pages long, making it difficult for these individuals and even accountants to navigate it. Luckily there are several good ways to save money on your taxes:
1. Make smart tax elections. Even though the year has ended, it is possible to beneficially impact taxes by making tax elections for optimal results. For example, you can deduct the cost of acquiring machinery and equipment in full up to a set dollar amount ($500,000 in 2017;). However, if you’re just starting up or are not profitable, you can use depreciation for these items. This can help produce deductions for future years when these assets may be more valuable to you.
2. Don’t overlook carryovers. Certain deductions and credits have limitations that can prevent you from using them fully in the current year, but could permit a carryover to future years. Keep track of carryovers so you won’t forget to use them in future years (this is done automatically by most tax preparation programs and should be done by tax professionals).
3. Use tax free ways to extract income from your business. While salaries, bonuses, and distributions of your share of business profits are taxable, there are ways in which you can perhaps profit from your business’ success without triggering tax. For example, tax-free fringe benefits, including medical coverage and retirement plans. Or, depending on your business structure, loans by the business to you on a no or low interest basis.
4. Shelter profits in retirement plans. It’s quite easy to set up a simple retirement plan for your employees. You don’t pay taxes currently on contributions to retirement plans. The funds grow on a tax-deferred basis; distributions are taxable when taken in the future (when you may be in a lower tax bracket).
5. Change your business structure. Whether you’re a sole proprietorship, limited liability company (LLC), or use some other business structure, it may be time to pick a new business structure. For example, an LLC can elect to be taxed as an S corporation. In this way only salary paid to the LLC owner is subject to FICA taxes. If no such election is made, the LLC owner pays self-employment tax (the equivalent of the employer’s and employee’s share of FICA) on all the business’ net earnings.
These are just some routes to take when trying to save on your yearly tax bill. Working with a CPA firm like BluePoint Financial can guarantee low tax liabilities and zero headaches.