Each year, small business owners overpay their taxes because they miss out on certain deductions and tax planning strategies that can reduce their taxable income. Often, it’s because they just don’t understand the tax saving strategies available to them. But you don’t need to make tax planning your full-time job to save money at tax time. As we’re very near the end of October, this is a critical time to perhaps consider a number of strategies to potentially maximize your tax savings as a business owner.
- Plan – Paying taxes is arguably one of the least enticing aspects of small business ownership. For that reason, some small business owners put it off. They skip making their required quarterly estimated payments, figuring they’ll catch up at tax time – but that can be a costly mistake. Federal tax code requires that taxes be paid on income as it is earned. For the individual as an employee, these taxes are withheld. As a small business owner, you need to make estimated quarterly payments. If you don’t make estimated payments or pay too little throughout the year, the IRS will charge penalties and interest.
- Consider a Change in Tax Status – As a small business owner, you have several options when it comes to structuring your business. You can operate as a sole proprietor, partnership, LLC, S corporation or C corporation. Each business structure has different pros and cons and changes the way that your business is taxed. If you outgrow one type of business structure, you can usually change it to one that’s a better fit. For example, LLCs can elect to have their business treated like a S corporation. As always, it is important to note that a tax professional – such as Dunham Tax Professionals – will be able to properly advise and generate a cost benefit analysis to see if a change is appropriate for your business needs.
- Income: Defer or Accelerate? – Many small businesses use the cash method of accounting on their books and tax return. Under the cash method, a company recognizes income when it’s received and expenses when they are paid. If you expect to be in a lower tax bracket next year, you might want to defer income to next year, when you’ll pay taxes at a lower rate. On the other hand, it may be appropriate to accelerate income, such as potentially lucrative contracts on the horizon are likely to really increase your business income, as well as changing your tax bracket. You may elect to collect those monies, report that and pay on that rate currently.
- Expenses: Accelerate or Wait? – If you’re in a higher tax bracket now but expect to be in a lower tax bracket next year. If you were planning on purchasing office supplies and equipment next year, you might want to accelerate those deductions, and take them this year to reduce your taxable income for the current year. Conversely, if you expect to be in a higher tax bracket next year, you might put off paying some bills and purchasing equipment and supplies until the next year, when you’ll need all of the tax deductions you can get.