If you’re a business owner, especially a small business owner, every penny counts. The more money you have, the more you can invest, the more your company grows, and the more money you have to take risks. Naturally, you want to save as much as possible on your daily expenses and daily operations. You may also wonder why you’re paying so much in taxes. Saving money on taxes is easier said than done, because the tax code is confusing. There are some common ways, however, that a lot of small business overpay on taxes.
Choosing the Wrong Business Entity Can Increase Your Tax Liability
The two main business structures, a limited liability company(LLC) and a corporation both have unique tax, legal and financial implications. The right way to structure one business is wrong for another, because each business is unique, so it is important to structure your business in the best way to limit personal liability.
For example, did you know that corporations, (“C Corporations) and their shareholders are subject to double taxes? According to the IRS, corporations are taxed when a profit is “earned, and then taxed to the shareholders when distributed as dividends.”
On the other hand LLC owners can pass profits through to owners as regular income. In this way, the company’s owners avoid double taxation, because its profits go on the owners’ tax returns. A limited liability company is sometimes taxed like a S Corporation, which means profits and losses pass to shareholders, not the business, whether owned by a single member or multiple members.
There are a number of reasons to choose a particular business entity. What is right for one is not right for another, and it is wise to consult with a tax professional if you have questions as to which entity is right for you.
Not Paying As You Go
Many new business owners believe their taxes are due on April 15th, because they pay personal taxes then. Taxes are more complicated than that for small businesses, however. You must pay quarterly estimated taxes and self-employment taxes. If you don’t, you are subject to an audit and subject to penalties and interest charges whenever you do pay. The self-employed must also pay a self-employment tax (Social Security and Medicare) quarterly. In other words, paying as you go means paying less.
Not Properly Planning
Many businesses pay too much in taxes, because they do not properly plan. Not planning in a number of areas can increase your tax liability. Here are some ways you can plan wisely:
- If you have a profitable business, it is wise to shelter income in a qualified retirement plan to provide a tax deduction for your contributions, as well as defer tax on earnings on contributions (the tax is paid when money deducted, usually at retirement). Employees with a retirement savings opportunity are more loyal. The IRS provides more information in Publication 560.
- Have a plan for keeping track of any money you reimburse employees for using personal vehicles for company business. This will allow you to reimburse them without counting any money given as extra income.
- Accelerate deductions and defer income to put income into the next year and have more deductions in the current year.
- Don’t miss out on tax credits and incentives, many of which are state-specific for business. A tax professional can help.
Investing in Your Company Can Help You Save on Taxes
It is possible to do in this in a variety of ways. One is to claim a depreciation allowance over five to seven years or longer when you buy business equipment. Sometimes you can deduct the entire cost of the equipment the year you start using any new equipment.
You can save on taxes by either claiming the actual costs of a personal vehicle used for business or using the IRS standard mileage rate.
It is also possible to sell property on an installment basis. You can spread the gain over the duration of the installments. You can also report the full gain in the year of sale.
For more information, feel free to contact us.