Every entrepreneur is looking for ways to save on taxes for their small business. For some, they only think about it once a year when they file and realize how much they’re paying. For others, it’s an obsession that consumes their entire year.
We don’t believe that you deserve to be able to focus on more important things (like actually running and growing your business), so in this post, we’ve got several tax-saving strategies and ways to save that you can implement fairly easily.
Hopefully, as you put these suggestions into practice, next year’s taxes won’t be nearly as shocking.
How Can A Small Business Save On Taxes?
According to a recent blog post by LegalZoom on the “top expenses taking the biggest bite out of your business”, overpaying taxes is one of the main 5 things small business owners are doing to lose money.
A few years ago, Small Biz Trends reported on a Clutch survey which found that 30% of small businesses think they’re overpaying on taxes. (Even though 95% of those same business owners also said they are confident that their financials are accurate.)
We understand how frustrating that is. You do all the right things as an owner, but still end up overpaying somehow.
With so many ever-changing tax laws to deal with and how easy it is to make costly mistakes even when your books are in order, it’s more important now than ever for small business owners to be able to save on their taxes.
Instead of leaving you to wonder “how can a small business save on taxes”, here are several uncomplicated tax-saving strategies and ways you can take better control of your money and reduce your tax burden.
Top 2 Tax-Saving Strategies For Business Owners
1. Make sure your company is set up as a pass-through entity.
For most small businesses, structuring your company as a pass-through entity from the beginning is one of the most high-value tax-saving strategies you can do. A pass-through entity is one in which the responsibility for paying taxes on business revenue passes through the company directly to the owner(s).
Examples of pass-through entities include sole proprietorships, partnerships, and LLCs. In these cases, federal income taxes are paid on the owner’s individual 1040 returns.
In a traditional corporation (C-corp), the business is taxed at a corporate tax rate then the owner pays personal taxes on whatever profits they take home. That is one advantage of having your business set up as a pass-through entity – you are able to avoid that extra layer of taxation.
Another advantage is that you can claim the QBI (Qualified Business Income) deduction when your company is structured as a pass-through entity. It allows you to reduce your taxable income by 20% thanks to the 2018 Tax Cut and Jobs Act.
2. Start saving for retirement.
As a small business owner, setting aside money now for when you retire isn’t just a good idea for the future. It can have definite benefits right now.
Contributions to certain retirement plans can significantly reduce your pre-tax income. Depending on how close you are to the edge of a particular tax bracket, lowering your taxable income could actually drop you down into a lower bracket.
So not only could you end up with less income being taxed, it could be taxed at an even better rate!
Small business owners have several options when it comes to saving for retirement, and you could qualify for a credit for up to $5,000 for the first 3 years of the plan:
- 401(k) – a traditional employer-sponsored account that both employees and owners can contribute to
- Solo 401(k) – a similar version designed for owners with no employees
- SEP IRA – a “simplified employee pension” plan available to businesses of all sizes that allows employers to contribute on behalf of their employees (or themselves.
For 8 more ideas take a look at a post we did on “10 Tax Strategies That Will Save Your Small Business Money.”
5 More Ways To Save On Taxes For Small Business
What are some other ways to save on taxes for small business? Here are five that we recommend.
- Taxes – Yes, you can reduce how much you pay in taxes by deducting the taxes you pay. Some taxes are built into the price of the product you purchase, like gasoline. Other taxes, such as payroll, property, and excise, are paid separately. These can be claimed as deductions when you file your federal taxes. Your CPA can help make sure you’re claiming the right ones.
- Benefits – When you spend money to create a better job situation for your employees through improved benefits packages, some of that can be claimed as deductions. Some examples include child-care assistance, educational expenses, group term life insurance, and premiums on employer-sponsored healthcare plans.
- Home Office Space – With more and more people running their small businesses from home, this is a way to save on taxes that shouldn’t be overlooked. The IRS requires that the space you claim is used exclusively for your business, so even if you operate from a corner of your family room that square footage is deductible.
Any direct expenses (like painting and furnishings) related to that space can be claimed along with indirect expenses such as the portion of your overall utility usage that your office space uses. The IRS provides ways of accurately calculating those figures and allows a deduction of $5 per square foot (up to 300 sf). - Donations – When you are generous with your money and old equipment, the IRS lets you use that giving to reduce your taxes a little. Most people automatically think of cash contributions but don’t forget to look around your office and see what unused pieces of furniture or equipment could be passed along to someone else. By giving those items to a qualifying 501(c)3 organization, you could deduct their fair market value on your taxes next year.
Check with your CPA before you give, and be sure to read our post on “Qualified Charitable Distributions (5 Things To Know Before You Give)”. - Debt – Paying off your loans not only will free up money that you can use to grow other areas of your business, but it will also free you from continuing to be taxed on your principal payments.
Additionally, when you are able to write off bad debt that you haven’t been able to collect from your customers, you can use that to reduce your tax burden as well. (Note: if a customer ends up paying their debt to you at some point in the future, you will need to go back and have the previous write-off reversed.)
How to Pay Less In Taxes As A Business Owner
One of the best ways to make sure that you aren’t paying too much in taxes is to hire a good CPA with lots of experience working with small businesses. It’s their job to stay on top of tax laws and know how to help you hold on to as much of your hard-earned money as legally possible.
We’ve been doing precisely that for our clients for over 40 years now. So schedule a call today to find out how we can help you too!
