Taxation can be quite a hassle, especially if you have just started your business and there is little profit margin. Due to the complicated business regulations, small business owners dread the taxation season and often need help. However, most people must understand that the Internal Revenue Code (IRC) has introduced various tax breaks, especially for new business owners.
Here, we have listed the top 7 strategies to help small businesses cut their taxes.
Deduct 20% From Your Qualified Business Income
The IRS allows up to 20% deduction from your qualified business income. The QBI deduction law was introduced in 2018 and enables business owners to only file taxes on 80% of the remuneration if the business is a sole proprietorship, partnership, or corporation. Notably, companies with incomes lower than $157,000 are eligible for the deduction in their QBI and thus save a lot of money on filing taxes at a lower income rate. However, consult your tax attorney to understand better the limitations and regulations required for QBI deduction.
Take Benefit From Depreciating Assets
Another clever way to save on business taxes is by taking a tax write-off on business assets. These assets can include office equipment purchases, vehicles, or even property. If the purchased assets are used within the company’s first two years, the IRS has set specific rules for writing off the tax. Consult with your tax attorney to save that extra chunk of money from your tax returns.
Decrease Your Business Income by Utilizing Tax Credits
The Federal government offers many amenities to businesses involved in corporate social responsibility and welfare. One key benefit is tax credits. The government has set up a whole tax credit system that encourages businesses to do certain things in return for tax credits. You can get tax credits for public welfare activities, such as eco-friendly campaigns, donations, events for the elderly and disabled, and other community-building programs.
Deduct the cost of any assistance and endowments to your vendors as well. There are strict rules and regulations regarding this one, and you might want your tax attorney to guide you on how to save taxes on entertainment and gift expenses.
Manipulate the Time Frame of Your Income and Expenses
If you follow the accrual accounting method, your income and expenses might reflect your balance sheet. Review your income and expenses and see if you can move forward with payment in the next fiscal year to save on your taxable income. It is essential to consult a tax attorney because you don’t want to break the law while saving on your taxes.
Write off Your Bad Debts
Take a thorough review of all the payments due to you and write off any such payments as bad debts. You can move these payments to your next fiscal year to save on your taxes. These bad debts can include unpaid credit lines, loans, or fees from vendors and service takers long pending. By writing these off as bad debts, you technically lower your business’ income, thus impacting the due taxes.
An IRS Qualified Retirement Plan
Another critical strategy to help you save on your tax filing is setting up an IRS-qualified retirement fund for yourself or your company employees. The IRS allows the deferment of taxes on several different retirement plans. Consult your tax advocate and set up a fund according to your business’s goals.
In conclusion, dealing with taxation can be particularly challenging for small business owners, especially in the early stages with narrow profit margins. The Internal Revenue Code (IRC) does, however, offer crucial tax breaks tailored for new entrepreneurs. The top seven strategies outlined here provide effective means for small businesses to minimize their tax liabilities. From leveraging the Qualified Business Income (QBI) deduction to utilizing tax write-offs on depreciable assets, managing the timing of income and expenses strategically, and taking advantage of tax credits for corporate social responsibility, there are various avenues for savings.
Additionally, accounting for gifts and endowments, writing off bad debts, and implementing an IRS-qualified retirement plan are all valuable measures. Consulting with a tax attorney is essential to ensure compliance and optimize returns. By proactively utilizing these strategies and staying informed about tax regulations, small business owners can confidently navigate the taxation landscape, contributing to their ventures’ sustainable growth and success.