Tax Strategies for Small Businesses

Paying taxes can be an extremely frustrating part of business ownership, for multiple reasons. For one thing, the tax code can be tricky to keep up with, particularly if you don’t have a professional tax advisor in your camp. For another, the amount of tax you pay can seem like it’s eating into your ability to be profitable and grow.

But even given those frustrations, there are strategies you can — and should — use as a small business owner to reduce your tax liability. Here, we take a look at a few.

Know your options

There are a variety of tactics written into the tax code that are there to help you legally limit the amount of tax you must pay: corporate structures, tax deductions, tax credits, and tax-free reimbursements. Engage a reliable CPA or tax pro to advise and educate you about how to put those tactics together to form a strategy for reducing your tax liability.

Plan ahead

Taxes aren’t just something you do once a year at tax time, or even quarterly when you pay estimated tax. Just as you methodically plan out and strategize every aspect of your business, taxes are another area where advance planning can put more money into your pocket.

Minimize self-employment tax with an S corporation

Self-employment taxes can feel excessive — like double taxation. If you have an LLC, and you elect to be taxed as an S corporation (which you can do through the end of the year), you can eliminate a large chunk of what you might pay in taxes on your annual income. Note that you still must set a reasonable salary when you pay yourself (meaning, the IRS won’t like it if you have the title of CEO, but a salary of only $30,000 a year). But the remainder of your income, after your salary is paid, passes through to you as a distribution of business income not subject to FICA, thereby limiting what you pay in federal taxes.

Consider alternative tax treatments or restructuring

It’s possible that a C corporation is the preferred tax treatment for your business. This could be the case if you need to offer tax-free fringe benefits to employees that aren’t an option for S corporations: things like medical and disability insurance, health savings accounts, retirement plans, and even reimbursement of meal expenses or tuition. Your tax professional can advise you about the best treatment.

Reduce taxable income by saving for retirement

Retirement may seem far off or impossible to save for when you’re trying to keep a small business afloat. Making contributions to the right defined contribution plan (such as a 401(k) or SEP IRA) can have the effect of keeping your taxable income below certain thresholds for the year, and put you on the path of ensuring a solid financial future.

Similarly, setting up an employer-sponsored retirement plan for your employees can save you because employer contributions are tax-deductible. You may also qualify for a tax credit in the year you establish your plan.

Lower your AGI

Your adjusted gross income (AGI) equals all taxable income items minus selected deductions. Keeping your AGI below a certain tax bracket threshold allows you to avoid some taxes and to take advantage of many tax breaks.

Delay end-of-year billing or accelerate expenses

If you conduct cash-based accounting, you could defer revenue for the current tax year by postponing billing and collections for some services to the following year. Or, you could prepay deductible business expenses and claim depreciation right away.

Knowing which tax benefits are out there for your small business, and which strategies can help you reduce your tax bill is an important part of running a successful business. Get the small business financial and tax services you need from Ironwood Wealth Management.