How to Avoid Business Tax Debt with Small Businesses
Taxes are something that small business owners wish to save to the maximum but at the same time, they are important for them. Tax obligations go hand-in-hand with running a business successfully. You need to be aware of how much in taxes you owe and have to pay, else your tax bill will grow. However, with careful planning and qualified small business accounting advice, you can significantly reduce small business tax bill.
Types of business taxes
There are four major types of business taxes, which are:
Income taxes: These federal taxes are paid by the business or the business owner on their share of business income and expenses.
Employment taxes: You need to pay your employer share under FICA (Federal Insurance Contributions Act), plus state and federal unemployment tax. If your business is incorporated, you owe these taxes even if you are the only employee.
Sales tax: If you are based in a state with sales tax and sell goods and services, you are required to collect sales tax on your transactions failing which you may have to pay penalties to the state.
Excise taxes: Depending upon the business you run, you may be required to pay excise tax for fuel, use of highways and other activities.
So here, we have come up with 09 tips on maximizing your deductions and eliminating the small business debt that will help you to keep more of the money you earn.
1. Keep close tabs on all receipts
Receipts can help offset your taxable income as these are goods and services that can be deducted from your taxes. These deductions could apply to certain structures or across all structures of your business. If you find keeping receipts for the whole year a daunting task, there are apps that can help you capture, store and organize all your receipts at one place. These apps can also sync with tax-filing software and allow you to keep proof of your every expense and deduction.
2. Utilize tax filling software, it’s your friend
It will make preparing and filing your taxes online much easier. With paper returns, all those small, missed deductions can add up to your small business tax even with the best certified public accountant (CPA). A tax filing software will not only make your tax hurdles easier but also ensure the reimbursement of any inappropriate fees that you may have been charged.
3. Make smart tax choices
Plan strategically about your expenditure to reduce your business tax bill. This can help you get deductions for the future when your assets may become more valuable to you. For instance, if you are currently in 15% tax bracket and anticipated to fall in 35% bracket in the future due to more profits earned by your business, you will be currently able to save $1,500 on a $1,00,000 deduction. However, deprecation over the next five years may produce you total savings of $3500 in 35% bracket.
4. Employ a family member
Financial advisors for small businesses suggest hiring family members to shelter income from taxes. You can even hire your children, as young as seven, IRS regulations allow for it. With this business tax-saving strategy, you will be able to pay a lower margin rate or eliminate the tax on the income paid to your children; however, your earnings should be from the justifiable business purposes. The children’s salary can be put in a Roth IRA for future purposes. You may also establish and fund a Roth IRA on behalf of your spouse with little or no income. The contributions to Spousal Roth IRA are governed by the same rules and limits as regular Roth IRA contributions.
5. Keep current with financial law and regulations
The tax law is constantly changing with many new developments presenting opportunities to eliminate small business debt, provided you know about them and act on time. Waiting for an annual meeting with your account for small business accounting advice for these positive tax opportunities may be too late to act upon them to leverage their most benefits. For example, following the hurricane Katrina, a number of tax saving breaks were created to run for a short time. Similarly, the Economic Stimulus Act of 2008 allows businesses to deduct the full price of qualifying equipment financed during a year.
6. Set up books and records
Even if you may have a casual approach to recordkeeping for your personal accounts, you can’t do this when it comes to your business. Without proper records, your expenditures may not be deductible. A computer-based recordkeeping solution can help you handle this yourself.
7. Follow your spending
While online banking may appear to be a lot convenient and fast, there is still plenty of room to miss the things here and there. Software tools can help you catch with all deductible expenses by tracking your expenses throughout the year. Ensure to sync your bank accounts and credit cards with the software so that your accounts are tallied into your spending. This way, you will be able to easily produce a report for all your spending when tax time rolls around again.
8. Pay for your retirement now
If you are self-employed, you can reduce your tax liability by putting additional money towards a traditional bank account. This money isn’t taxed until the funds are withdrawn in retirement. Small business owners under 50 are allowed to contribute up to $5,500 to the traditional or Roth IRA, while those above 50 are allowed to contribute up to $6,500 to their retirement accounts. This type of IRA can also be combined with the retirement plans like SEP IRA, thus allowing you to contribute up to $55, 000 per year.
9. Forecast your business cash flow
Estimate your tax impact and prepare for your payments and deductions. Modeling out the flow of your receivables and payables alongside your sales pipeline will not only help you in your small business debt but also allow you to thrive and grow your business steadily.
Following the above tips on eliminating small business debt, you can significantly reduce your business tax bill. At Mathews & Nulty, Inc., we provide professional grade advice on tax savings to small businesses. You can schedule your no obligation online consultation at 732-257-8604 with our expert financial advisor for small businesses to evaluate your situation and come up with the best small business accounting advice for your specific needs.