Tax season is upon us, and we all want to find ways to reduce our tax liability. This is especially true if you own a small or mid-sized company where every dollar really counts. Read on for expert tips and tricks that can help your business take advantage of every possible tax benefit.
1. Consider changing your entity status
There are a lot of options for how your company files its tax return, and it may impact the amount of tax you pay. One common entity formation is the single-member LLC, says Daniel Kochka, CPA and managing principal at Integrated Accounting Solutions, LLC. “It’s easy to set up, it’s cost-effective, and it separates your business from your personal life.” Filing as a single-member LLC, unlike filing as a sole proprietor, means your personal assets may be protected from business debts and lawsuits. Additionally, by setting up a business EIN (employer identification number), you don’t have to share your Social Security number each time you onboard as a new client.
But an LLC can alternatively be filed as an S corporation, which gives you the same legal separation with the benefit of not having to pay self-employment tax. “As long as you’re paying yourself reasonable compensation based on market research, the distributions you take from the S Corp help you avoid self-employment tax,” says Kochka. “However, owners must follow payroll tax rules, including reasonable compensation, and salaries must be at fair market value to avoid IRS scrutiny.”
2. Review your accounting system
During the year, when you’re trying to keep your business moving along, it’s easy to get sloppy with your books, but messy books lead to missed tax-saving opportunities. Payments for subscriptions to trade journals or money spent on a new computer, headphones or office supplies ordered online may get lost if not accounted for properly.
In addition to reviewing your books at least monthly to make sure they’re in good order, applying for a business credit card may make it easier to keep qualifying business expenses separate. “If you have an expense that’s part business and part personal, paying for it through a business account will ensure it’s recorded and doesn’t get missed even if you end up not deducting the full amount in the end,” says Rachel Richards, CPA and head of tax products at Gelt.
3. Set aside what you can for retirement
There are a variety of retirement options for small business owners to invest in, such as a solo 401k, SEP IRA or a SIMPLE IRA. “[These options are] a great way to, one, reduce your tax liability and, two, start to put money away, which is usually forgotten about as a small business owner,” says Kochka.
If you are in a loss this year or in a lower tax bracket (so tax liability is not a big concern) but you still have money you want to set aside for retirement, a Roth IRA or Roth 401(k) may be a better option. The money in a Roth account is not currently tax deductible, but the growth will be tax-free, and so will the amount you take out in retirement.
4. Keep up with quarterly payments
The safe harbor requirement, or the amount you should be paying each quarter to the IRS, is typically 90% of the current year’s tax liability or 100% of the prior year’s tax liability (110% if the prior-year income was over $150,000), whichever is smaller. “What a lot of people don’t see on the tax return, because it’s buried on the bottom, is there [are] penalties involved for not making proper estimates,” says Kochka.
The end of the year is a good time to see if you met that requirement each quarter and make plans for the following year. Keep in mind that if a spouse has payroll withholding, those amounts can help meet safe harbor requirements when filing jointly.
5. Look for additional tax deductions or credits
Small businesses may qualify for additional tax deductions or credits. For example, business owners may be eligible for the qualified business income deduction (QBI), which allows them an additional deduction of up to 20% of their qualified business income.
The Augusta Rule is another way to reduce taxes by increasing your business expenses. “If you’re hosting a legitimate business meeting or a company retreat, you can rent your home to your business instead of paying an outside venue,” says Richards. If your home is rented for less than 14 days a year, not used as your primary place of business, and you comply with several other rules, you can potentially exclude that rental income from your personal return while deducting the rent payment on your business return.
Additionally, some businesses may qualify for a credit for research activities, for example, if your business is working on developing new techniques or improving existing processes, explains Richards. You don’t have to be a scientist to qualify; the key is in creating technological innovation or process improvements.
At the end of the day, there are numerous variables to consider when you file your tax return. Proactive tax planning helps create a system that minimizes surprises and maximizes savings so your business can thrive.
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