Here are five general tax strategies for businesses:
- Deductible expenses: One of the easiest ways to reduce your tax liability is by claiming deductible expenses. Deductible expenses are expenses that are necessary and ordinary for your business. Examples of deductible expenses include rent, salaries and wages, office supplies, equipment, and travel expenses.
- Depreciation: Depreciation allows you to deduct the cost of long-term assets such as machinery, equipment, and buildings over time. Depending on the asset and the method of depreciation, you can deduct a portion of the asset’s cost each year. This can reduce your taxable income and lower your tax bill.
- Retirement plans: Offering a retirement plan, such as a 401(k) or IRA, can provide tax benefits for your business. Employer contributions to a retirement plan are tax-deductible, and employees can contribute pre-tax dollars, reducing their taxable income.
- Entity selection: Choosing the right business entity can have significant tax implications. For example, a sole proprietorship may have lower administrative costs, but may pay more in self-employment taxes than a corporation. Consult with a tax professional to determine which entity is best for your business.
- Tax credits: Tax credits are more valuable than deductions because they directly reduce your tax liability dollar-for-dollar. There are several tax credits available to businesses, such as the research and development tax credit, the work opportunity tax credit, and the small business health care tax credit. Be sure to consult with a tax professional to determine which tax credits you qualify for.
Here are five more tax strategies for businesses:
- Timing of income and expenses: Timing is important when it comes to taxes. You may be able to lower your tax liability by deferring income to the following year or accelerating expenses into the current year. This can help you control your taxable income and potentially lower your tax rate.
- Section 179 deduction: The Section 179 deduction allows businesses to deduct the full cost of qualifying equipment and software purchases in the year they are placed in service, instead of depreciating the cost over time. This can be a powerful tax strategy for businesses that make large capital investments.
- State and local tax incentives: Depending on your location, you may be eligible for state and local tax incentives for creating jobs, investing in new equipment or facilities, or operating in certain industries. These incentives can include tax credits, exemptions, and reduced tax rates. Consult with a tax professional to determine which incentives are available in your area.
- Charitable donations: Charitable donations can provide both a tax deduction and a way to give back to your community. Depending on the type of donation and the organization you donate to, you may be able to deduct up to 50% of your adjusted gross income.
- Tax planning and compliance: Finally, one of the most important tax strategies for businesses is to engage in tax planning and compliance. This includes staying up to date on tax laws and regulations, keeping accurate financial records, and filing your tax returns on time. Working with a qualified tax professional can help you stay on top of your tax obligations and avoid costly mistakes.
- Tax-loss harvesting: If you have investments in stocks or other securities, you may be able to offset gains with losses by engaging in tax-loss harvesting. This involves selling investments that have declined in value to realize a loss, which can then be used to offset taxable gains.
- Health savings accounts (HSAs): HSAs are tax-advantaged accounts that allow individuals to save for medical expenses. Contributions to HSAs are tax-deductible, and withdrawals for qualified medical expenses are tax-free. For businesses, offering a high-deductible health plan paired with an HSA can provide tax benefits for both the employer and employees.
- Tax-efficient investments: Some investments, such as municipal bonds and tax-managed funds, are designed to be more tax-efficient than others. These investments can help you keep more of your investment returns by minimizing taxes on dividends and capital gains.
- Outsourcing: Outsourcing certain business functions, such as accounting or payroll, can help you save time and money, while also providing tax benefits. For example, outsourcing payroll can help you avoid costly mistakes and penalties related to payroll taxes.
- Estate planning: Finally, estate planning is an important tax strategy for business owners who want to minimize taxes on their wealth and assets. This can involve strategies such as gifting, trusts, and life insurance, which can help you transfer wealth to your heirs while minimizing estate taxes. Working with a qualified estate planning professional can help you create a plan that meets your needs and objectives.