Expensive taxes are stressful to the average business owner. The last thing an entrepreneur wants to do is to spend all their hard-earned income settling government tax obligations. Finding ways to minimize your tax liability can benefit your profit margin. Apart from consulting an experienced tax attorney, here are five clever ways to reduce your business’s taxable income and avoid being cheated by the IRS.
1. Employ your family members
One proven strategy to cut down your business taxes is to recruit more workers from your own family. The reason is that the Internal Revenue Service allows a range of options that can potentially help you shelter your business income – one way to leverage this opportunity is to employ your own children.
According to certified public accountant Scott Goble, small businesses that hire their family members can reduce their taxes by paying a lower marginal rate. For instance, sole proprietors don’t need to pay social security and Medicare taxes on their children’s wages – the same is true for FUTAX (the Federal Unemployment Tax Act).
2. Contribute to a retirement plan
There are retirement account varieties that help business owners maximize their savings and enjoy several tax benefits. For instance, with the 401 (k) plan, the IRS may allow a participant to contribute up to $57,000 for their retirement.
The Simplified Employee Pension Plan and the 403 (b) plans are all good retirement vehicles that can help you minimize your tax liability. Businesses can access a wide variety of retirement plan options on the IRS website.
3. Know the deductions you are legally allowed to make
Paying taxes has never been fun for any business owner, but if you figure out which deductions you can legally make, you may be able to limit your taxes. According to Gary Milkwick, most businesses lack sound knowledge of tax deductions, and therefore, often miss out on saving big money every year.
Examples of expenses that business owners can legally deduct from their taxes include contributions to retirement plans and the purchase of business equipment, including computers, printers, smartphones, and monitors. Business phone bills and maintenance costs of business vehicles are allowed. Additionally, 50% of meal & entertainment expenses on business partners, employees, contractors, and clients are also allowed.
4. Invest smartly
If you are a business owner who wants to make investments in new equipment, the period can impact your tax liability for the current year or the next one. At the beginning of the year in January, decide what investments you want to make before the year ends.
When it’s November, and you are thinking about buying more equipment within the next several months for business expansion, it helps to accelerate your purchase. This will allow you to get the deduction in the current year. On the other hand, when you decide on launching a massive marketing campaign during the coming several months, try to prepay for the costs to make deductions for the current year.