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Updated: March 27th, 2020
Many business owners quickly realize it’s not how much money you make that’s most important … it’s how much you keep after paying all your business expenses. One of the potential differences between those two figures is your tax bill.
You may be more focused on running and growing your business than maximizing its tax efficiency, and that’s probably a good thing (stick to your strengths!). However, implementing practices and procedures that minimize your tax obligations could save you money. You can then reinvest in your business or use the money for other financial goals.
Here are seven ideas to get you started.
Starting a tax-advantaged retirement plan and making regular contributions can be a win-win for both you and your business.
“If you have a small business, you need to have some type of vehicle so you can save for retirement,” says Paul T. Joseph of Joseph and Joseph Tax and Payroll in Williamston, MI. “If you don’t take care of yourself, who’s going to?”
Small business owners may be able to choose from different types of qualified retirement plans, such as a Solo 401(k), SEP-IRA, or SIMPLE IRA. The best fit will depend on your circumstances, and you may want to consult an accountant or financial advisor before choosing an account.
What does this have to do with taxes? The contributions you make as an employee may be deductible on your individual tax return. Plus, the company’s contributions could also be a deductible business expense.
Additionally, if you create and offer a qualified retirement plan to your employees, you may be eligible for up to $500 in business tax credits per year, for up to three years, to offset related administrative and educational expenses.
Hiring one of your children as an employee in your business could provide several financial benefits:
Of course, this arrangement might not be a good fit for every business or family as there are rules you’ll need to follow. For example, the child must be making a real contribution to your business. The jobs can vary — everything from helping out at your live events, cleaning your office, or modeling for the company’s advertisements — but the pay also has to be reasonable for the work.
“A lot of times people just incorporate, but they don’t think about the tax consequences until later, or even never,” says Joshua Wu, a tax attorney and partner at the law firm Clark Hill Strasburger.
Perhaps you never registered your business, and are running your business as a sole proprietorship. There isn’t necessarily anything wrong with that, but incorporating might lower your small business taxes.
Even if you already incorporated, you may want to reevaluate your business structure, as The Tax Cuts and Jobs Act of 2017 (TCJA) made several significant changes to business taxes.
There are different business entities to choose from, such as a limited liability company (LLC) or S corporation. You can consult an accountant or tax attorney to figure out how a change will affect your taxes, and a business attorney to draft the required documents and ensure the paperwork matches your desires.
“The most important thing you can do is get with someone who can give you advice for your specific circumstances,” says Wu.
“If you’re doing research and development in specific areas, then your company may qualify for a credit based on the expenses you pay in that area,” says Joseph. R&D tax credits (also known as research experimental tax credits) aren’t just for scientists, either. “You could qualify if you’re developing a new product or improving an existing product, but you have to meet all the requirements.”
If your business’ activity qualifies, your expenses for supplies, computer leasing, and in-house or contract salaries and wages could count as qualified research expenses. The new tax bill could increase the value of the R&D credits for some business, making it even more worthwhile to see if you qualify. Plus, many states have similar tax credits that you may be able to claim.
The tax credit could offset your business’ income tax liability, or be carried forward if your business didn’t make money this year. Or, small businesses that don’t have gross receipts from before 2012 may be able to claim the R&D tax credit against their payroll taxes rather than their federal income taxes.
In some cases, the tax code allows you to choose when you want to claim your business expenses. You may be able to claim a deduction for the entire cost of a purchase in the current year, or depreciate your asset and claim a deduction for a portion of its value over the product’s lifetime.
For example, if you buy $5,000 worth of computers and office equipment, you may want to claim the entire expense this year to lower your business’ profit and pay less in taxes. Alternatively, you could take a deduction for a portion of the products’ value each year for the first three years. If your business is growing and you expect to move into higher tax brackets in the coming years, it could be more valuable to take part of the deduction later.
The timeline and rules can vary depending on the circumstance and what your business purchases. It may not make a big difference with minor purchases, but a tax professional may be able to advise you on your best course of action when it comes to major expenses.
For example, the new tax law eliminated an itemized deduction that employees could take for unreimbursed expenses that were over 2 percent of their adjusted gross income. Joseph says some of his clients, such as wine and liquor distributors, traditionally didn’t reimburse employees for mileage expenses in the past.
“The employees that are used to taking the deduction are going to be shocked when they find out they can’t do that,” says Joseph. With the labor market tightening in his area, the businesses may need to change their policies if they want to keep their employees.
“The deductions are falling off for individuals, but the company can reimburse the employee and take the deduction,” says Joseph. “It can be expensive, but if you’re doing it when other people aren’t then you have a leg up on keeping your employees.”
Other types of benefits may also qualify as business expenses, such as the retirement plans discussed above and healthcare plans for employees.
Hiring an accountant or tax attorney with a trained eye and breadth of knowledge about business taxes could be a worthwhile investment. Particularly someone who is familiar with your industry and can make recommendations based on general best-practices and your specific situation.
Even if you don’t want to pay a monthly fee and outsource your bookkeeping, set money aside for once-a-year or biannual tax checkups. Tax laws can change, as could your business, and a tax professional may be able to provide ongoing advice for how you can reduce your small business tax bill.
Funding Circle believes informed consumers are better consumers. We strive to provide informative and educational content useful for you and your business. However, please note that tax laws and regulations are complex and subject to change. We strongly recommend consulting your financial or tax professional regarding your specific circumstances.