Paying taxes when due is crucial for small businesses that intend to remain in operation. As much as tax is essential, you certainly don’t want to give away all your hard-earned money to the government.
You shouldn’t feel guilty about finding ways to save extra money to grow your small business. In 2021, ProPublica reported that American billionaires paid almost no income tax. Are you wondering why they weren’t prosecuted? Well, they are practising tax avoidance.
Tax avoidance is a legal way of reducing taxable income. On the other hand, tax evasion is the use of illegal tactics to conceal earnings from authorities. It is punishable under the law.
Here are some tips to help reduce your tax bill and instead use the fund to expand your small business.
1. Keep a detailed and accurate record
Keeping detailed and accurate reports on your business will help immensely when you’re calculating payable tax. This will significantly reduce the possibility of overpaying the tax bill.
This can be done by extracting data from invoices and bank statements.
Doing this periodically will save the stress of having it sorted all at a time when you are due to pay tax. A die minute rush could also make you omit some records which could have reduced your payable tax.
2. Charge for home-office and use of personal car
A business needs a place to run, so even if it’s run from home, it shouldn’t exempt it from incurring such a cost. Charge for the use of your home office space. The IRS will permit this if you can back it up with evidence.
Also, charge for the use of a personal car for business purposes. The business needs to pay for the services. At least, that would have been the case if you had hired a third party.
In rare circumstances, the car may get damaged during a business trip and the matter could be worse if it is driving under influence. For this kind of scenario, you may want to involve the service of a lawyer. According to Aaron Black Law, a team of DUI lawyers in Phoenix AZ, “Poor handling of issues arising from driving under the influence of alcohol or other drugs can get messy if poorly handled. With a good lawyer, you may be able to claim tax deduction using your car repair receipts”.
If the business also requires you to travel a lot, don’t cover the expenses from your pocket, let the business pay for it. This should be done even if the business is being bootstrapped.
3. Employ the service of family members
This is a trick known by many small business owners. Hiring a family member permits you to pay a lower marginal rate and at the same time eliminate income tax.
Businesses are expected to pay three major taxes per employee. These are social security tax, medicare tax and federal income tax.
Employing your children, for instance, protects the business from paying all of these kinds of taxes.
The same applies to hiring a spouse. Depending on the circumstances, such as if they have another job, you may be able to contribute to their retirement savings; thus saving more taxable income.
4. Hire a professional
Engaging the service of an expert on tax matters can help you identify the different ways to leverage the tax law to your advantage. You can always reuse the given advice later without needing to rehire any.
It is also possible you run into problems with the IRS. Don’t try to figure this out on your own, it might complicate the issue ― get a tax attorney.
5. Pay your retirement plan
Self-employed and small business owners have a wide variety of retirement plans to explore. They include:
● Simplified Employee Pension Plan (SEP)
● 403(b) plans
The IRS permits up to $57,000 contributions for 401(k) plans, and you can still fund your traditional IRA up to $5,500 per year. Small business owners older than 50 years old are allowed to contribute more.
6. Deduct money for healthcare
The government understands the importance of your health. Hence, it permits you to take care of yourself even at the expense of taxation. Over the years, the cost of medical services has significantly increased.
You can open a Health Savings Account (HSA) if you have a High Deductible Health Plan (HDHP). This plan has a larger annual deductible than typical health plans. It charges a lower monthly premium. As of 2022, the IRS pegged the amount for HDHP at $1,400 for individuals and $2,800 for families.
7. Engage in non-profit activities
If your business is actively involved in community service or donation to charity, it is time to leverage that.
Donating cash or other assets to charitable organizations qualifies you for a tax deduction if you can provide a 501(c)(3) receipt from the organization.