In the post-COVID economy, small business owners are struggling to stay afloat. As tax season deadlines are quickly approaching, business owners need to consider ways in which they can reduce their taxes, thus increasing their overall profit. Continue reading to find some legal ways of reducing these tax payments.
Qualified Business Income
Businesses that are a sole proprietorship, an S corporation, or a partnership may be able to deduct 20% from their income. This is another way of reducing your tax liability in addition to regular business expense deductions. A business usually qualifies if their taxable income is below $157,500 or $315,000 if married filing jointly. Consult with a tax preparer to see if this deduction will apply.
Contribute to a Retirement Plan
Setting up and contributing to a qualified retirement plan can lower tax payments. The retirement plan needs to be one that the IRS allows deferment of taxes on until the money is withdrawn. These include IRAs and 401(k) or 403(b) plans.
Take Advantage of Tax Credits
The federal government encourages businesses to do things that affect the greater good of the country. There are tax credits available for hiring people, using green technology, giving access to disabled employees, and providing health care for workers. These tax credits are included as part of the General Business Credit. Because this credit is very extensive, businesses may qualify for at least one credit in this category.
Buy Large Equipment
Businesses can often deduct purchases of vehicles, business equipment, machinery, and even real estate. The write-off is taken in the first year that the item is owned and used. If a business will benefit from having another vehicle for deliveries or work-associated driving, consider buying one to help offset taxes.
Deduct Gifts Given
Businesses can deduct up to $25 per person for gifts given to customers or vendors. However, a business cannot use the deduction for gifts that have the business name on them or for items that cost less than $4.60. In the past, it was possible to deduct the cost of entertainment with a client. Now, unless the entertainment is directly relat3d to the business, it cannot be deducted from taxes.
Advantageous Timing
Often, timing the income from the business can help lower taxes. If a lot of taxes are going to be due in a given year, it may be beneficial to move the income to the following year. It is also possible to increase expenses by stocking up on supplies or purchasing a large ticket item, such as a car, computer, or other machinery.
Write Off Bad Income
The end of the tax year is a good time to review customer accounts. If there are customers who aren’t going to pay, they can be written off as a “bad debt” and these amounts can be deducted from the business income. This, in turn, will save on taxes that need to be paid. Bad debts can also include loans given to employees, vendors, or clients who don’t pay them back.
Hire a Tax Advisor
It is always important to consult a tax expert before making any decisions that can affect business taxes. Hire an expert who has extensive experience with business taxes. Enrolled agents are often the best choice, since they have passed a difficult test, and worked for the IRS at some time in their career.
Paying taxes is an annual event that cannot be avoided. However, business owners can use the suggestions above to help keep more money in their own pockets.
