Many small business owners are unknowingly paying more than they have to towards their federal taxes! Much of this has to do with either ignorance or confusion regarding what can and cannot be deducted. If you are looking the maximize your tax deductions this year, then consider the following recommendations. Please note, however, that the conditions may vary depending on the unique circumstances of your business, you should consult with an accountant or professional tax consultant before making any decisions.
1.Tax planning is year-round. Many small business owners do not start thinking about their income tax deductions until the end of the year draws near. Since small businesses often deal with tight cash flows and small profit margins, they stand to benefit a lot from a full reduction in their tax payments. To do so requires planning and foresight that really extends throughout the whole year!
2. Efficient financial accounting. The next step in maximizing your small business tax deductions is having an accurate picture of your company’s financial situation. Your books should be clear and up to date. You should also have a system for collecting and filing any receipts for business expenses. Finally, you need to be on top of your cash flow, namely accounts payable, accounts receivable, and inventory.
3. Hire a tax consultant. Hiring an accountant or a tax consultant, is good business practice- especially if you are unfamiliar with basic business accounting. Hiring such a professional is a tax-deductible business expense, and the tax advice you will receive should also help pay for the cost.
4. Increase your expenses. One well-known method of increasing your tax deductions is by increasing your business expenditures shortly before the years ends. Depending on your available cash flow, you could do the following:
- Purchase items your business will require in the immediate future, such as office supplies
- Pay any outstanding bills, such as rent or utilities, early
- Take care of any repairs or maintenance that you have been putting off
- Make any business trips to existing or potential customers
5. Make year-end equipment purchases. If plan on buying buying new office equipment or furniture, then consider purchasing it at the end of the year. You will then have to decide whether you want an immediate write off or a depreciation that is spread out over a few years. Keep in mind that to claim the deduction, your equipment needs to be set up and in use by year-end.
6. Delay or defer income. Any income that is expected in December, but can be deferred to January, will lower your yearly business income. If your income is smaller, then the taxes you will have to pay will be accordingly reduced.
7. Split your income. By splitting your income among family members hired to work in your business, you can reduce your tax liability.
8. Contribute to a retirement plan. Making payments to a retirement plan is another good way to reduce your tax obligation. If you do not currently have a retirement plan then consider setting one up before the end of the year. In the US there are several plans to choose from, each with their own terms and conditions, so make sure to check these out beforehand.
9. Be aware of what can be deducted. Small business owners who want to take full advantage of income tax deductions need to be familiar with expenses they are entitled to claim. The following is a brief list of some common deductible expenses. For more information regarding how and when these expenses can be deducted, you should consult with your accountant or professional tax consultant.
- Advertising and Promotional Expenses
- Banking Fees Including:check charges, monthly charges, bank wire fees or overdraft fees.
- Business Gifts
- Business-Related Education, such as seminars, classes, and educational tapes or video
- Charitable Contributions
- Conference and Convention fees
- Equipment and Furniture This includes the cost of the equipment, furniture, or vehicle purchased, as well as depreciation on old equipment, and lease payments
- Health-Insurance Premiums
- Insurance (for buildings, machinery or equipment)
- Interest and Fees (on money borrowed for the business)
- Losses Losses from theft, fraud, damage from natural disasters
- Meals and Entertainment
- Membership Dues
- Moving Expenses
- Office Rent Expenses
- Office Supplies
- Postage and Shipping Expenses
- Professional Fees Including: legal help, accounting and bookkeeping, architectural, business consulting and marketing consulting)
- Property Taxes
- Repair and Maintenance On the building, grounds, and equipment
- Retirement Accounts for self and employees
- Salaries of Employees
- Software Costs
- Taxes This includes: sales tax on items purchased for business usage, real estate tax on business property, employer’s share of employment taxes, excise taxes and, in some instances, state income tax
- Telephone and Telecommunications Expenses Including, Internet, television and other communication usage for business purposes
- Trade-show exhibition and/or attendance Including travel, meals, admission fees and costs of booths or exhibitions.
- Travel This includes: automobile expenses pertaining to business usage, using either actual costs of repair and gas or the standard mileage deduction, hotels, airfare, meals, laundry and business entertainment while on the road. You can also claim the costs of passports for self and employees when traveling for business purposes
- Utilities
Don’t pay more taxes than you need to… Be creative, Be smart!