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Tax Planning Strategies for Business Owners

Sharissa Barnett Jul 2, 2024 8:16:13 AM
tax planning for accountants

Businesses are always looking for ways to earn more and spend less. However, cutting on some costs, especially taxes, is still complicated for small businesses. Tax regulations and laws make it hard for these businesses to cut their expenses on taxes and remain compliant. 

Tax planning strategies are effective ways to help businesses save money and comply with regulations. Tax planning occurs when a business analyzes its financial situation to ensure it pays the lowest tax possible. 

It involves activities such as timing income, taking advantage of credits and deductions, and planning for all business expenditures. Effective tax planning is a financial management strategy that ensures a business achieves its long—and short-term goals.

But how does tax planning for business owners work? This article outlines tax planning strategies proven to work for businesses of all sizes.

1. Maximize the Tax Deductions

If you work from home, start reducing your taxable income through the home office deductions. This tax strategy planning works because the law allows you to deduct the expenses related to using part of your home for your business. To qualify, the space in your home must be used regularly and exclusively for business purposes.

Other business expenses that are tax deductible include office supplies, utility bills, rent, and professional service fees.  As long as these expenses are directly related to your business, keep a record for tax planning purposes. Consult tax professionals to understand what expenses qualify for tax deductions and how you can calculate them.

2. Change Your Business Status

The status of your business can determine how much you can save on taxes. Whether you’re operating as a sole proprietor, a partnership, an S/C Corporation, or a Limited Liability Company (LLC), you have to understand how taxes work for every structure. Strategic tax planning might involve changing your business structure based on what you think might help reduce taxes.

For example, if your business is operating as a sole proprietor or a partnership, your taxes will be tied to your personal tax returns. For an LLC, which is separated from its owners, the taxes are quite flexible. The LLCs are free to file as sole proprietors or S Corporations.

If you believe your business has grown beyond its current status, change its structure. For example, changing an LLC to a C corporation means you’ll qualify for tax benefits for such business structures. Seek advice from a tax professional before changing your business status or starting your tax business.

3. Make Use of Tax Credits and Incentives

Leveraging tax credits and incentives are tax planning strategies that businesses can embrace to save money. Tax credits reduce the amount of taxes businesses owe by decreasing the taxable income.

accountant working on tax planning strategies Some examples of tax credits include the Work Opportunity Tax Credit (WOTC), which reduces taxes for companies that employ people facing employment barriers. Businesses that invest in clean energy also qualify for tax credits. Additionally, businesses can claim tax credits by providing health insurance coverage to their employees.

State and local tax incentives are geared towards attracting investors and promoting business growth. Businesses that support specific industries, create jobs or invest in economically disadvantaged areas qualify for the incentives. An endless list of credits makes up corporate tax planning strategies.

4. Defer or Accelerate Income

Another one of the best tax strategies is deferring or accelerating income. Businesses have high and low seasons, which means income changes. Tax planning for small businesses helps them effectively embrace these seasons and come up with effective tax preparation plans.

Accelerating income happens when a business decides to recognize its income early so that they’re taxed for the same year rather than the next year. This tax planning strategy mostly happens when a business believes that it falls at a lower tax the current year than the following year. Or when a business feels that they have deductibles and credits that may not be available in the next tax year.

Businesses can also defer their income as a tax planning strategy. When a business defers its income, it reduces the amount of taxable income in the specific tax year.

Businesses do this by postponing billing or holding off invoices and payments. For example, when you offer a service to a client, you can defer their payment by not invoicing them right away. You can choose to bill them the following year and reduce the taxable income for the current year.

5. Time Your Purchases

If you want to purchase a new asset or equipment, appropriate timing can be one of your business's taxation strategies. Consider making the purchases towards the close of the tax year if you want to gain tax advantages. This is a strategic tax planning measure that qualifies you for depreciation deductions and other tax incentives for maximized tax savings.

By writing off your asset purchases, you can qualify for two types of deductions. One is section 179 deductions, which permit a deduction of the total cost of some assets up to a certain amount. Another is bonus depreciation, which gives you a higher deduction the first year of purchasing certain equipment.

6. Contribute to a Retirement Account

Setting up and contributing to a retirement account is another effective business tax planning strategy. An effective tax business should involve setting up and contributing to retirement savings.

Both 401(k) plans and Individual Retirement Accounts (IRAs) qualify businesses for significant tax benefits. For instance, setting up a 401(k) plan before the year ends allows you to deduct any contributions to it when you file a tax return. When the amount is deducted from your personal income, you get a low tax bill.

Another plan is the simplified employee pension plan (SEP), which you can set up if you miss the cutoff for setting up a 401(k). Setting a SEP also qualifies you for tax deductions for the contributions you make to the plan. You may also qualify for a startup costs tax credit, which goes up to 50% of the plan's startup cost.

7. Make Charitable Contributions

Being generous with some of your income can help you save on taxes. Charitable contributions allow your small business to make a social impact as well as lower its taxable income.

Making charitable contributions to certain organizations qualifies you for tax deductions calculated depending on the amounts contributed. Keep track of all the contributions you make to charities and present them for deduction every tax year. 

8. Work with a Tax Advisor

Lowering taxable income is good tax planning strategies for small businesses that want to save costs. However, tax laws can be complicated, and what you think of as basic tax planning strategies can turn out to be a breach of tax regulations. Working with a tax advisor can help your business stay compliant and navigate tax season challenges.

A professional tax advisor can help you understand the tax laws and keep up with the ever-changing regulations. They’ll help you come up with tax planning strategies by pinpointing deductions and credit areas for your business. They’ll also advise you on the decisions that may impact your taxes either positively or negatively.

Maximize Tax Benefits with Basil

Business tax planning strategies have seen them achieve tremendous reductions in taxable income and growth. With these effective tax planning strategies in place, businesses achieved great financial milestones while still adhering to tax laws and regulations.

Embracing these tax planning strategies strengthens businesses' financial standing and helps them gain a competitive advantage. Working with a tax professional can ensure these businesses stay informed on tax planning strategies that can work for them.

Basil Practice Management for Accountants identifies tax planning areas that are likely to work for your business. It’s a refreshingly simple software for accountants and tax professionals who want to help businesses minimize their expenses. Give Basil a try today with a free trial and start an effective tax planning journey.

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