Small businesses don’t have the advantage of huge budgets and unlimited resources enjoyed by bigger organizations. Thus, every penny counts.
As a small business owner, you want to maximize your revenue while minimizing your tax liability. This is where business tax planning comes in. If you do some business tax planning before the end of the tax year, you can lower your federal tax bill before the next tax season.
Unfortunately, most business owners avoid tax planning until it is tax season. Read on below to understand more about business tax planning and how it is valuable to smaller businesses.
Business Tax Planning Strategies
There are numerous small business tax planning strategies available today. Some of these strategies focus on the business’ tax position while others focus on the business owner’s tax situation. However, regardless of how complex or simple your business’s tax strategy is, the main goal will be:
- To reduce your company’s taxable income
- Lower your tax rate
- Helping you avoid the most commonly committed tax planning mistakes
- Control the impacts of Alternative Minimum Tax on your business
- Claim available tax credits
- Control tax payment time
To develop the best tax planning strategies for small businesses, you must estimate your business and personal income for the next several years. This is essential because most people create strategies that save you money at one income level while creating a larger bill at the next level.
Ensure you avoid creating a strategy based on incorrect numbers and income projections. After correctly estimating your income for the next few years, you can now estimate your tax bracket.
Remember to accurately estimate your sales revenues, cash flow, and income for the company’s planning purposes. The more accurate these estimates and projections are, the better your chances of creating the best tax planning strategy for your business.
Below are some of the essential steps to take to create an effective tax strategy for your business:
1. Maximize Your Business Entertainment Expenses
Always remember to deduct your business’s entertainment expenses. These are legitimate and legal deductions that can help you lower your tax bill and save your business hundreds and even thousands of dollars. However, you must strictly follow the provided guidelines by the IRS when calculating these deductions.
For an expense to qualify as an entertainment deduction, you must discuss business before or during the meal. The IRS also requires that you have these discussions in a conducive environment for business.
For example, a nice, small, and quiet corner restaurant would provide an ideal environment to discuss business. However, a nightclub is not an ideal location. Thus, be careful of the location you choose and avoid places with distracting activities that may inhibit your business meeting.
Locations such as theaters, golf courses, sporting events, and ski trips are not ideal locations to conduct business meetings.
The IRS allows businesses to deduct up to 50% of their entertainment expenses. However, you must have well-documented records and receipts. The participating parties attending a business lunch or dinner must also have a specific business agenda to discuss.
2. Essential Business Automobile Deductions
Do you use your vehicle for business purposes? If you visit clients or attend business meetings in different locations using your car, your business may be eligible for automobile deductions.
You can include the cost of maintaining and operating the cars you use for business purposes as a tax deduction. You can deduct the automobile expenses by using the actual costs of the standard mileage rate. In 2017, the mileage reimbursement rate was 53.5 cents per mile.
If you have two cars, include both in the deductions to reduce your tax bill. This method works because the business use of the vehicle determines the number of business miles you drive. To calculate the business use, you will have to divide the number of business miles you drove by the total number of miles.
This is one of the best strategies as it may result in higher deductions. However, whatever method you choose, ensure you keep correct records and receipts as well as mileage logs for each car.
3. Deduct Charitable and Philanthropy Contributions
Partnerships, sole proprietors, S-corporations and LLCs, cannot deduct charitable contributions from their taxable income as a business tax. However, business owners can claim any charitable contributions made by the company as an itemized deduction. They can do this on Schedule A of Form 1040.
The CARES Act authorizes businesses for a one-time deduction of up to $300 for any contributions they made to charitable organizations.
4. Claim Your Company’s Healthcare Tax Credit
Healthcare tax credit is one of the best ways to save your business some money. This credit is ideal for companies that pay less than $50,000 annually with less than 25 full-time employees. To qualify, you must be paying health insurance premiums for small businesses for at least half of the 25 employees.
However, you must check with your tax professional or CPA to confirm if you qualify for this tax credit.
Now You Understand More About Business Tax Planning
If you run a small business, the tax season may come with a whole set of new challenges and stress every year. Fortunately, numerous business tax planning strategies could benefit your business.
If you work with a CPA, ensure you have a sit-down and work out the different tax planning strategies that could benefit your business. There are many tax deductions and credits that could reduce your tax bill, saving your business hundreds of dollars.
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