6 Tax Planning Strategies For Small Businesses

Small business owners are always looking for ways to maximize their profits. One effective strategy is to reduce your tax payments legally. In this blog, we will review 6 tax planning strategies for small business owners that will help ensure tax season goes smoothly.

1. Change Tax Status

Your tax obligations depend on the structure of your business. You can run your small business as a corporation, limited liability company, partnership, or sole proprietor. These business structures have different tax regimes and can increase or reduce your overall tax payments. Evaluate how your business has changed and if you need to change the business status to a structure that provides better tax benefits.

2. Consider Home Office Deduction

If you run your small business from home, the home office deduction is an excellent way to reduce your overall taxes. The deduction allows you to deduct any expenses on the portion of your home that you use for your business. Qualifications include using the space regularly and exclusively for business purposes. 

You can calculate the home office deduction in two ways. The first one is the simplified method that allows a flat rate of $5 for every square footage of the home office. However, you can’t claim home office deductions for more than 300 square feet.

The other strategy is to find the percentage of the home that you use for your business. You will then calculate the deductions by subtracting the percentage amount from your expenses, such as maintenance repairs, utilities, rent, or mortgage interest.

3. Manage the Timing of Expenses and Income

If your projections indicate that the next year’s income will be higher than the current year’s income, accelerate expenses and defer the income. For example, you can make huge purchases in the last quarter of the year to increase expenses. At the same time, postpone sending invoices for the last quarter of the year to the first quarter of the next year.

When you defer income to the next year, you won’t pay taxes on that income during the current year. However, the expenses will enter as a deduction from the current income. This strategy requires precise timing and a clear understanding of the business’s future look. If you can’t decide on your own, talk to your tax advisor or accountant.

4. Claim All Legitimate Tax Deductions

The IRS code contains various deductions to encourage certain financial activities and discourage specific behaviors. For example, the code has various deductions to help small businesses. Here are some of the deductions small business owners can claim:

• Contributions to your retirement benefit 
• Money spent on continuing degree-aimed education for your workers
• Certain travel expenses that qualify as business expenses
• Advertising activities that increase awareness about your products or services

The IRS regularly reviews the tax code, and a professional accountant can help you discover tax deductions for your small business.

5. Write Off Bad Debts

If you have any debts that have been unpaid for a while, write them off. For example, if the customer has not paid pending debt in a while and you don’t expect to get any payment soon, write off the debt. When you write off the debt, the business’s tax payments for the current year reduce.

The only problem is if the customer ends up paying the debt in the future. In this case, you may have to reverse the write-off and include it in your taxes.

6. Consider the Latest Small Business Tax Changes

Congress and state legislatures review the tax law every year. Most of the changes often reduce the burden on small businesses. Before you prepare your end-of-year taxes, check the latest tax changes and how they affect your taxes. 

Proper tax planning is essential to business growth. Golden Tax Relief helps small businesses and other entities to prepare taxes on time and correctly. Contact us to find out more about our offers.