Tax season isn’t fun. Having to run through every single cent that’s gone in and out of your company and make sure you know what you can and can’t claim for is a major stressor for many business owners. Because it’s not always easy to be straightforward, and come tax time, it can be entirely overwhelming. But the thing is, there are so many businesses leaving money on the table and overpaying taxes they shouldn’t be paying.
This post is going to look at some tax credits and decisions you might be overlooking.
If you contribute to a retirement plan, this is one of the easiest ways to reduce your taxable income. Yet many small business owners either delay setting one up or do not contribute as much as they could.
If you make contributions to a SEP IRA, SIMPLE IRA, or a solo 401(k), these are deductible in the year they are made. This means every dollar you put in reduces the income you are taxed on.
And the limits are actually generous too. Particularly for SEP IRAs. These allow contributions of up to 20% of net self-employed income. And if you have employee contributions you make, their vehicles are also deductible. Setting up and contributing to one of these plans for yourself or your employees can reduce your current year’s liability.
The Research and Development tax credit is one of the most underutilized business tax incentives available. And this is due to smaller businesses only thinking this is applicable to larger corporations or for scientific research.
It’s not. The credit is available to any business that is developing or improving products, processes, software, or techniques, regardless of the size.
Whether you’re a manufacturing company improving precision processes, a food and drink business developing new recipes, or a software company who is building new platforms, you can use this credit to your advantage.
It’s worth looking for help from experts in the field like Alexander Clifford, so you know exactly what you can and can’t claim to ensure you’re not overstepping admin strains come tax season.
Employing a family member is a legitimate way to reduce your tax bill, and it can be overlooked by many businesses.
If your business is a sole proprietorship and you hire your spouse as a genuine employee, their wages are deductible as a business expense. And depending on their income and living situations, this can shift to a lower tax bracket and reduce the household’s overall tax burden, too.
It’s also worth looking into hiring your children. Wages paid to children under 18 working in a sole proprietorship or partnership owned by their parents are not subject to Social Security or Medicare taxes. And children under 21 are exempt from federal unemployment tax. However, wages do need to be reasonable for the work performed, and you must ensure the employment is genuine, but if you meet these conditions, there are real tax benefits you can gain.
Did you know that if you have a high deductible health plan, contributing to a health savings account reduces your taxable income in the year you contribute? It also grows tax free too and can be withdrawn tax-free for qualified medical expenses.
For self-employed individuals who are also paying their own health insurance, those premiums are often also fully deductible as well.
When you combine these two benefits, the HSA contributions and self-employed health insurance deductions, you can make a substantial offset at tax time, which makes a great difference to what you owe. And the good news is they’re both quite straightforward to do but are often missed.
The legal structure of your business has a direct impact on how much tax you pay. And many small business owners stuck with their original structure long after it stopped being the most tax-efficient option for them, too.
Sole proprietors pay self-employment tax on all net earnings. But if you move to an S Corp status, you can pay yourself a reasonable salary and take the remaining profit as a distribution, which is not subject to self-employment tax. And you can make significant savings by doing this.
However, the right structure for your business depends on a range of factors; you can’t just pick one for the tax benefits. Your income level, the nature of the business, and how you want to pay yourself, as well as the state you operate in, all matter here. It’s worth talking to an accountant, though, to understand how this applies to you better, to make the right status decisions for your business, not just for tax reasons.
Any travel that is directly related to your business is deductible. This might extend more than you realize. You can claim for flights, accommodation, car rental, and transportation costs for a genuine business trip. If you combine a business trip with a personal one, then you need to be able to demonstrate that a primary business purpose existed.
You can also claim for the mileage driven on your vehicle for business travel too either at the standard IRS rate or based on actual vehicle expenses. All you need to do is keep an accurate log of all of them covered for business purposes to substantiate any claims you make at tax time.
The Work Opportunity Tax Credit is available to businesses that hire employees from specific groups who face barriers to employment. This can be veterans, long-term unemployed individuals, recipients of certain government assistance, and others. The credit can range from $2,400 to $9,600 per qualifying hire, depending on the category and the hours worked. Although this tax craft is subject to change and withdrawal from Congress, it’s still worth seeing if it’s applicable to your business.
You will need to get certification from the relevant state workforce agency if you are eligible, and this needs to be done at the point of hiring and can’t be applied for down the line.
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