Many experts suggest that businesses should put aside 30%-40% of their income to cover taxes.
There are a lot of challenges you’ll face when running a business, and dealing with taxes is one of the most noteworthy. It’s something you can’t avoid, and you need to ensure you don’t make any mistakes.
Business taxes can be complicated, so dealing with them may be very time-consuming. To make things easier for yourself, you can employ certain strategies that will help with the whole process.
Keep reading for some effective business tax planning strategies that can help you master your tax returns.
Manage the Timing of Your Income and Expenses
It’s common for businesses to accelerate expenses and defer income to help with taxes. This typically involves delaying invoices from the fourth quarter and instead sending them in the first quarter. Large purchases can be made before year-end rather than a few months later.
Delaying these invoices means that the income from them will be a part of your business tax return for the next year. When it comes to accelerated expenses, you can then claim business tax deductions against them for the current tax year.
Note that this will benefit you this year, but maybe not next year. It’s best to discuss this with your accountant or tax advisor to determine how to use this strategy effectively.
Make the Most of Depreciation
You can record an asset’s loss in value as a business expense, and doing this can lower your taxable income. In most cases, you’ll need to spread this across multiple years, or maybe even decades. However, federal law will allow you to depreciate 100% of qualified assets the year it was purchased up to a value of $1 million.
This only applies to assets put into service between September 27, 2017, and 2023. You can do the same for property put into service after 2023, but only up to 80%.
Being able to make deductions in this way could significantly reduce your business taxes. Equipment like computers, software, machinery, vehicles, furniture, and more can qualify. Speak to a qualified tax attorney to ensure you do this right.
Use the Qualified Business Income Deduction
Some businesses can deduct up to 20% of their income, and if yours is a pass-through business, you may be able to do this. Sole proprietorships, single-member LLCs, and S corporations may be eligible, but C corporations aren’t.
Factors like income level and business type will determine how much your business can deduct, or even if your business can qualify. Many service companies, for example, aren’t able to due to the business type. This is something else you can discuss with a tax advisor to see what kind of deductions you can make.
Fund Retirement Plans
Retirement plans offer deductions for both individuals and businesses. You may not have a retirement plan already, so setting one up can be a good idea.
Corporation owners can make contributions to tax-deferred plans resulting in tax savings. A defined benefit plan can be a good option here, but it’s worth noting that they’re more complicated than other options like IRAs. You should get a professional to assist you with this to avoid making mistakes.
Offer Employee Benefits
There are various benefits you can offer employees. Health insurance is a common choice that helps attract and retain quality talent. Benefits like these can offer deductions to help lower your taxable income.
Increasing wages will increase your employment tax costs, so doing this is a great way to give more to your employees without having to pay more tax. Other than health insurance, you can consider things like life insurance, tuition assistance, transportation benefits, and more.
Practice Good Bookkeeping
Bookkeeping can be tedious, but it’s incredibly important. You want to stay on top of things to ensure your accounts are always accurate.
Managing your accounts well will ensure you’re paying your taxes as you should be and keeping all finances in order. It can be a good idea to outsource your bookkeeping to an accounting company. They’ll ensure things are always done correctly, helping you avoid issues.
Leverage Health Savings Accounts
This is something you can do alongside offering health insurance. If your plan has a high deductible, you might be able to fund an HSA (health savings account).
You can deduct contributions to an HSA from current income which allows the account to grow tax-free. If you need to make any withdrawals for qualified health expenses, these are tax-free too.
Consider Relocation
Business tax rates can vary based on location. Some states and cities have lower tax rates than others, so moving your business can help you save on taxes.
South Dakota and Wyoming, for example, have no individual or corporate income taxes, so businesses here can benefit from that. Alaska is another good example as it has no individual income tax or sales tax. Other states that are ideal for tax purposes include:
- Oregon
- Montana
- New Hampshire
- Nevada
- Texas
- Tennessee
- Washington
Of course, there may be various factors that affect where you want your business to be located. Consider the tax implications alongside your other business needs to determine where you should relocate your business to, or if you should even move it at all.
Making Use of These Business Tax Planning Strategies
Taxes can have a sizable impact on how much your business makes, but it’s still essential to pay them. With that in mind, reducing them where possible can be very beneficial.
These business tax planning strategies can help, but you have to do things right to avoid any issues. Working with an experienced tax attorney is the best way to reduce your business’ taxes while still ensuring you’re paying what you need to.
For more legal articles, take a look at some of our other blog posts.