It's a question virtually every small business owner asks themselves in some form or another throughout their career: How can I decrease the taxes I pay within my business? And it's an important question to ask! Although taxes may be inevitable, there are several tax decrease strategies to implement to help you pay less.
The first and arguably most important thing a small business owner can do to save on taxes is to develop excellent bookkeeping strategies. Without them, you'll have more tax liability and less peace of mind, which is an obvious goal to strive for!
We break it all down in this post, but here are some basic tax decrease bookkeeping strategies for small business owners to start:
As a small business owner, you give up a 401(k) match matched by your employer because, well, you don't have an employer! But there are still many retirement account options to help you maximize retirement savings and get valuable tax benefits.
For example? In a one-participant 401(k) plan, the IRS allows you to put away up to $58,000 (as of 2021) in total contributions for retirement.
Here's a helpful example the IRS shares:
"Ben, age 51, earned $50,000 in W-2 wages from his S Corporation in 2020. He deferred $19,500 in regular elective deferrals plus $6,500 in catch-up contributions to the 401(k) plan. His business contributed 25% of his compensation to the plan, $12,500. Total contributions to the plan for 2020 were $38,500. This is the maximum that can be contributed to the plan for Ben for 2019."
It might also be time to rethink your business strategy if you're hoping to save on taxes. One such consideration is becoming an LLC or limited liability corporation.
We outline the tax considerations for making this change in this post, including this explanation from Investopedia:
"In the case of a corporation, profits are first taxed at the corporate level and then taxed a second time once those profits are distributed to the individual shareholders. Many businesses and investors decry this “double taxation.”
On the other hand, limited liability companies allow the profits to be passed directly to the investors so that they are taxed only once, as part of the investors’ personal income."
So, while it isn't the right choice for every small business, changing your business structure to an LLC can come with certain tax advantages, which makes it an option worth exploring.
Do you travel a lot for business? Don't forget to include your travel expenses as part of your tax decrease strategy! Business travel is fully deductible, but personal travel is not. However, if you are conducting personal travel and there's a way to incorporate business into this trip, there are more options for deducting these travel expenses.
(Here's another article you won't want to miss next: Small Business Tax Help: Getting Your Business Through Tax Season)
Let's face it, keeping up with your own books when you're a busy small business owner feels impossible most days. Couple that with the added stress of tax time, and it's no wonder, so many businesses outsource their bookkeeping and tax services.
Are you ready to make that jump? We're here to help! In addition to our bookkeeping services, we also offer tax services, including year-round tax preparation that includes more tax decrease strategies.
Click here to learn more or contact us to get started today.