As year-end tax filings draw near, small business owners look for ways to save on their tax liability. Filing taxes can be a daunting process for small business owners as they attempt to fulfill tax obligations efficiently and in a manner beneficial for their businesses. Growth in a business will result in an increase in tax liabilities. If you are a small business owner, prudent planning through consultation with a tax professional can help reduce your firm's taxation bill. This would involve adjusting the small business tax strategy based on an assessment of its current financial performance and adopting tax-friendly provisions that bring down the tax liability. We provide a few tips that you can adopt in consultation with a tax professional to maximize savings for your business this tax season.
Tips for Tax Savings
1. Deferring income/expenses
As a small business owner, you can consider deferring incomes or expenses based on business conditions. If business for the year has been slow and profits are lower than expected, you can consider deferring expenses and increasing income for taxation purposes. However, such a step should only be adopted if you are anticipating higher profits during the following year. Income growth is accelerated by speeding up cash collection before December 31 while simultaneously deferring the payment of expenses till after the new year. This will result in the income received during this year being taxed at a lower rate, while the expenses carried forward to the next year can be useful to set off against the higher income of the new year. On the contrary, if profits are expected to be high this year, you can consider deferring income to the next year and increasing expenses in the current year to reduce the taxable income for the year. This can be achieved by paying some of next year's expenses in the current year.
2. Qualified business income deduction
If your business is structured appropriately, you can claim a Qualified Business Income deduction under the Section 199A. As a small business owner, you can avail of a 20% deduction in qualified business income when calculating federal taxes. However, this deduction is applicable on “pass-throughs”, a process where the owner pays the tax on the business income rather than the business itself paying the tax. That tax break is scheduled to expire after 2025 without changes from Congress, which could affect millions of filers. Consult a tax professional to know if this deduction is applicable to your business.
3. Resourceful tax planning
If you have a fairly good idea of how your business is likely to perform during the next tax year, you can prepare for the possibility of higher taxes by creating a cash reserve that can be used to pay the IRS. This will ensure you do not face liquidity problems when it is time to pay your taxes. Another way to meet your tax liabilities for the year is to pay estimated taxes based on the tax paid during the previous year. So, if your business did not do well the previous year, you would be required to pay a relatively low amount of estimated tax for the current year which would preserve your liquidity. Ensure you pay at least 90% of the tax estimated for the current year or 100% of the tax on your return for the previous year whichever is lower, to avoid being penalized. The balance would be due at the end of the current year. These figures should be worked out with the help of your tax consultant or accountant.
4. Use your car for business purposes
Using your car for your business can have several tax benefits for your small business. Car expenses are permitted as deductions from taxable income. Deductible car expenses are calculated at a standard mileage rate of cents per mile or actual expenses are considered. Eligibility for this deduction will depend upon taxable income.
5. Create a retirement savings plan
Creating a retirement plan secures your future and helps reduce the tax rate on your income. Individuals and businesses can contribute to a SEP IRA or 401(k)-retirement plan. Business owners can set up retirement plans for their employees and the cost of setting up and administering these plans can be claimed as a deduction.
These are just a few ways in which small businesses can reduce their tax liability and increase liquidity. These steps to reduce your tax liability can be adopted in consultation with a tax professional based on your business size and organizational structure.
Finlotax: A Professional Accounting and Taxation Firm in CA
We are Finlotax, a prominent bookkeeping, CFO and taxation firm based in CA. We take care of all your complex bookkeeping and financial needs at affordable prices. We can help you save on taxes with our tax planning and consultation services. Just reach out to us at 4088229406 and talk to our experts.