Tax Planning Tips for Small Business Owners

GuestAccounting, Tax

Guest Post by: Bryce Welker

The best taxes are the ones you don’t have to pay.

Unfortunately, many small business owners are overpaying on taxes by not taking advantage of the many tax breaks, reliefs, and incentives that the government offers.

Sure, many small business owners consider tax handling as the most challenging aspect of running a business. To that end, some even engage in unethical practices, such as tax avoidance that not only lead to problems but also undermines the integrity of the tax system.

If you want to ‘legitimately’ save money on your business tax bill, tax planning is essential. You need to be aware of what taxes to pay, when to pay, and most importantly, how to exploit the available tax-saving opportunities. Here are 5 tax planning tips for small business owners.  

1. Keep Your Records Organized

Don’t wait until the end of the accounting period to start putting your books together for tax preparation. Get organized early and stay organized.

Clean and organized books along with all the supporting documentation help to avoid late filing penalties and allow you to take advantage of the available tax incentives.

Keeping your records organized and up to date can also help to keep your tax preparer’s fee down. CPAExamGuy put together a very insightful small business accounting cheat sheet that can help you track your payments, manage inventories, and keep all your records organized.

2. Take Tax Credits to Lower Your Business Income

The federal government leverages tax credits to encourage businesses to act in certain ways it deems beneficial to the nation.

When utilized, some of these tax credits can significantly lower a business’s taxable income. For example, you can take tax credits for going green, doing research work, providing health coverage for employees, as well as providing employment opportunities to disabled persons.

3. File Your Taxes on Time

It’s important to file and pay your taxes on time. If you don’t, the IRS will subject you to various penalties, including the penalty for not filing/late filing as well as a late payment penalty.

These penalties may vary depending on the type of enterprise. For instance, C corporations are subjected to late filing and late payment penalties on the amount of tax due, while partnerships penalties are be based on the number of partners.

These penalties can be very costly for small businesses. To be on the safe side, always file for your taxes, even if you cannot pay. It helps to show good faith as well as reduce the penalties.

4. Take Advantage of IRS Sec 179

The US Internal Revenue Service (IRS) has various provisions that businesses can take advantage of to reduce their tax burden.

For example, section 179 of the IRS code allows businesses to deduct the purchase price (up to $1,000,000) of qualified equipment in the first year of acquisition.

Business owners can also take advantage of the Bonus Depreciation that provides for 100% write-offs, for all eligible purchases made after September 17, 2017. However, there are restrictions on the type of property that can be depreciated using Bonus Depreciation.

While you don’t have to buy property you don’t need to benefit from this deduction, if you plan on buying one in the future, you may want to accelerate the purchase to get this deduction in the current year.

5. Fund a Tax-Deferred Retirement Plan

A retirement plan is a great tax saving tool for business owners.

That’s because it allows owners to claim a deduction that significantly lowers the taxable income. Usually, the contributions are kept in an IRS qualified retirement account until a certain age threshold is reached. These contributions are tax-deferred until distributions are made.

What other legitimate tax-saving tips do you know of that are great for small businesses? Share with us in the comments section below.

 Bryce Welker is an active speaker, blogger, and tutor on accounting and finance. As the Founder of Crush The CPA Exam, he has helped thousands of candidates pass the CPA exam on their first attempt