As a business owner, you wear a lot of hats. In addition to managing your employees, maintaining production lines, and keeping customers happy, preparing taxes may often on your plate. In tax season, and out, let’s discuss the key tax strategies every business owner should consider to save more, reduce their tax burden, and alleviate stress.
Maintain Necessary Documents and Reports
Ensuring you prepare taxes as efficiently and accurately as possible typically involves organization. Whether you work with an accountant or do your own taxes, a record and accounting system can help you stay on track and better prepare when you have to file. Here are a few of the documents and actions you should consider:
- Determine and gather the correct forms you need based on your business’s legal structure, for example, if you’re a sole proprietor, LLC, or another type of entity.
- Be prepared to provide records for the following:
- Quarterly tax payments
- Profit and loss statement
- Payroll taxes
- Charitable donations
- Track your expenses. Using accounting software or a spreadsheet, ensure you track your business expenses separately from your personal costs and accounts.
- When you’re ready to file, have your personal information, such as SSN, EIN, dependent information, and previous year’s filings, readily available.
Reduce Your Taxable Income
Managing your tax burden is a top priority for business owners. You can implement several strategies to save money, defer your payments, or reduce your tax impact. A significant way to do this is to find ways to reduce your taxable income. Here are a few ways to do that:
- Identify eligible tax deductions. Standard deductions typically include operating costs, charitable donations, retirement contributions, marketing investments, and more. There are other deductions you may qualify for as a business owner, such as if you use your home or vehicle for business or travel for work.
- Ensure you have kept records of all receipts and purchases for tax preparation and audits.
- Consider a net operating loss (NOL) carryforward. An NOL occurs when your deductions surpass what you’ve made for the year. You can use a carryforward to deduct a reported loss from your total profits for a future or previous year, possibly for multiple years.
- As there are specific criteria to meet, we recommend consulting with a CPA to see if you qualify for certain deductions.
- Time your income and deductions. Deferring your income or accelerating your deductions is strategically timing your business purchases, delaying payment collections, or taking other actions that can leverage your current financial situation or tax bracket.
- For example, suppose you’ve had a high-income year. In that case, you can accelerate business deductions for the current year by purchasing equipment, making a charitable donation, or prepaying costs such as rent toward the end of the year. You can also time the distribution of invoices at the end of the year to report the income in the following year.
- Start a retirement program. You can already reduce your taxable income through contributions to your retirement. Further, establishing an employer-sponsored retirement program for your employees can also provide tax breaks, such as credits for each eligible participant and additional deductions for the operational, administrative, and third-party expenses required to manage the plan. This is also a great way to reward loyal employees, stay marketable, and help save for the future.
Work With a Professional
Working with an attorney or accountant for your business has several benefits, including ensuring you’re identifying every tax-saving opportunity available. In addition, a team of professionals can help you:
- Stay aware of new tax law changes and requirements
- Make adjustments to maximize your retirement plan
- Find more deductions you may qualify for or have overlooked
- Discuss other business tax strategies and benefits for your specific situation, such as:
- Hiring a family member, which may provide tax exemptions and other advantages
- Scenarios in which you should consider changing the structure of your business to leverage more tax benefits, for example, removing some personal risk if you switch from being a sole proprietor to an LLC
- How a marital change or potential business exit will affect your income and tax liability
Proactive and attentive tax planning can help business owners at every stage of business save more money and reduce their payment burden. Use this checklist to ensure you take advantage of all the opportunities and strategies available. For more business resources and tools, visit our blog.