Every business owner is looking for ways to reduce expenses without reducing quality or losing customers.
But few businesses look to the one area almost guaranteed to save money: income taxes.
It has been estimated that America’s small businesses overpay their income taxes by more than $2 billion a year. The overpayments were made because the businesses failed to take all of the tax deductions they were legally entitled to. Many of these businesses are still unaware of their errors.
Naturally you can’t count on the IRS to help you. They won’t tell you about a tax deduction you were entitled to but didn’t claim. Discovering legitimate deductions is up to you. That’s one reason why it’s important to make sure you’ve got good advice.
Our tax system is indeed very complex, and tax laws are ever changing. The Internal Revenue Code, the “Federal Tax Authoritative Guide,” is a thick book with over 1.3 million words.
However the taxes you pay have a tremendous impact on the profits of your business. It is extremely important to consult with an accountant who can help you get the most deductions and assist you in planning for the future.
In pursuing lower income taxes, it is never necessary to resort to tax cheating or tax loopholes, or even to question the legality of the tax system.
Tax strategies are positive, legal use of the tax laws to reduce your income taxes. Tax strategies are legitimate actions you can take to automatically and legally qualify you for additional deductions.
Some tax strategies are straightforward and obvious. Other tax strategies are just as legal, just as easy to use, but less understood. Below I have shared seven strategies that I’ve found people can use to quickly reduce their taxes.
Please bear in mind that this information is believed to be correct at the time of writing but things change so make sure you get the right professional advice.
#1 – Fully deductible business expenses
Business expenses are deductible in full directly from gross income. You can deduct any expenses that are “ordinary and necessary” to run your business, even if they benefit you personally.
In general, “ordinary” means common and accepted in a field of business, and “necessary” is something helpful and appropriate to that business.
In addition to being “ordinary and necessary,” it has been held that a business expense must also be “reasonable.” Whether an expense is reasonable depends upon the facts and circumstances in a particular situation.
Are you incurring expenses in your business that are not being used to reduce you tax?
#2 – Full home office write-off
No longer does the home office need to be the “principal place of business” for the taxpayer. The home office test can now be satisfied if the taxpayer uses the home office for “administration or management activities” and there is no other fixed location in which the taxpayer performs such activities for his business.
The home office still must be used exclusively for business purposes to qualify but this will allow more taxpayers who conduct business outside of their office, but use their home to perform administrative tasks, to qualify for the home office deduction.
Are you using your home for business purposes – or could you start doing so? Could this help to reduce your tax?
#3 – Deducting auto mileage to and from your job
If you use your car for business, or your business owns its own vehicle, you can deduct some of the costs of keeping it on the road. Mastering the rules of car expense deductions can be tricky, but well worth your while.
Do a few minutes of work for your home or small business before you leave the house for your job and when you return to your house after work. Document this activity (a few e-mail messages, letters, or phone calls) each day in your day planner, journal, or other permanent document, and also keep a written record of your mileage. This allows you to deduct this mileage as miles between jobs.
If your auto is used for both business and pleasure, only the business portion produces a tax deduction.
# 4 – Renting property to your business
As a business owner, you have the opportunity to be compensated for your financial risk, as well as the services you provide to the business. You do this by retaining any real estate used in your business, in your own name, or in the name of a limited liability company (LLC) you own. Then, you lease the property back to your company.
This gives you income that can be increased in later years as the business thrives and you avoid paying self-employment taxes on that income. Simultaneously, it gives your company a deduction.
The benefit of this strategy is dependent on a number of factors like the tax bracket you are in, the rate of expected appreciation on the property, etc. I recommend that you consult with your accountant.
#5 – Examine your business structure
This strategy is probably one of the more common ones I find small-business owners missing out on. How you organize your business structure can have a significant effect on the taxes you pay. By structuring your business as a pass-through or S-corporation you are only required to pay the employer share of FICA taxes on what you take as salary. With S-corporations, a percentage of your earnings can pass through the corporation to you as dividends, thus reducing your FICA-eligible wages.
Tax and other benefits of various structures can vary from business to business. A qualified accountant can help you determine the most effective way to organize your business.
#6 – Charitable contributions
If your business is a partnership, limited liability company or S-corporation (a corporation that has chosen to be taxed like a partnership), your business can make a charitable contribution and pass the deduction through to you, to claim on your individual tax return. If you own a regular C-corporation, the corporation can deduct the charitable contributions
#7 – Advertising and promotion
The cost of ordinary advertising of your goods or services – business cards, yellow page ads and so on – is deductible as a current expense. Promotional costs that create business goodwill – for example, sponsoring a peewee football team – are also deductible as long as there is a clear connection between the sponsorship and your business. For example, naming the team the “Toms River Auto Parts Blues” or listing the business name in the program is evidence of the promotion effort.
Here’s the key. Many small-business owners worry about their taxes only during tax season. However, you will save a fortune in taxes, legally, if you make tax planning your year-round concern.
Make year-round tax planning part of your business management mindset and thus enjoy maximum tax savings. By rearranging your affairs to account for tax implications, you will save a fortune in taxes.
It would be advisable to consult a tax professional or accountant for proper planning and documentation for some of the more complicated tax strategies, but using these strategies could save you thousands of dollars in taxes.
For more on this topic, please check out my book “Secrets of Small Business Success in the San Francisco Bay Area“.