According to the IRS, about 69% of taxpayers take standard deductions every year. Many small businesses are also taking advantage of the ability to make deductions from their tax bill.
Whether 2017 was a favorable or bad year from a tax viewpoint, it is important to reflect on it and make quick and smart tax moves so that you are well prepared when filing your taxes.
Below are five small business tax strategies to help your small business save money in 2018.
1. Use Losses to Your Advantage
If you buy and sell stock or other investments throughout the year, you could incur income tax if you ended up making money on your trades. If you have owned the investments for less than a year prior to the sale date, you will be taxed at your normal income rate.
However, one great way to offset this amount is by selling any stocks that you currently have in a losing position. The losses will directly offset your gains and will reduce your tax bill.
Any undeducted losses beyond the $3,000 can then be rolled over into future years.
2. Setting up and Contributing to a Retirement Plan
You can reduce taxes by contributing to a retirement plan.
The plan works even for moonlighting and sidelined businesses. Several plans have minimum paperwork and are fast in administering the program.
3. Contributing to the IRA
You can use the self-employment income to build a tax-sheltered investment and contribute to a Roth or traditional IRA. You can also make contributions towards a spouse’s IRA whether they have little or no income.
IRAs defer the taxation from the investment income, and you can deduct or withdraw the income tax-free.
4. Defer Bills, Bonuses and Earned Income
You can reduce taxes by delaying sending bills and invoices to clients or customers until after the New Year.
By doing this, you defer some of the tax to the next year, reducing the amount payable in taxes in that particular year. You can also use bank products for tax preparers to shield your income.
5. Giving Appreciated Assets to Charity
If you are planning to donate a gift to charity, it is better to give an appreciated long-term asset than sell it and give the after-tax proceeds.
Giving the asset instead of cash prevents you from paying capital gain tax, which saves you money depending on the amount due on the sale and your tax bracket.
6. Taking Advantage of Special Deductions
You can expense up to 5500, 000 this year by acquiring qualified equipment for use in the business right away instead of writing it off over several years.
You can also deduct 100% of your health insurance premiums as a business expense or establish a Simple IRA, SEP, Keogh or a Health Service Account. All these play a significant role in helping you reduce taxes. 6. New Deductible Expenses for Small Businesses
The US tax code is always changing. Recently, the IRS changed some of the rules associated with deductions and depreciation. These changes are broadly beneficial for small businesses.
Unfortunately, many business owners don’t know about the new rules; instead of taking advantage of them, these business owners pay higher taxes under the old system.
An accountant can help you to identify deductible expenses for your small business.
Here is how deductions affect small businesses.
How They Affect Small Businesses
The new rules affect the tax treatment of small capital improvements. In the past, businesses had to determine whether a purchase was expected to last more than a year.
If the business expected the item purchased to last more than a year, the business had to depreciate it using the appropriate IRS schedule. Depreciating a purchase meant that the deduction had to be taken over a number of years, and was generally less beneficial to the business owner than an immediate deduction.
Under the IRS’ new de minimis accounting rules, businesses can immediately write off purchases of under $2500. Instead of having to decide how long these purchases will last, businesses can treat them as expenses.
The new rules are even better for small businesses that make improvements to real estate. If a business qualifies as “small” under the IRS’ definition, it can immediately deduct up to $10,000 in building repairs, maintenance, and improvements (this limit is capped at 2% of the basis of the property).
Reduce Taxes by Filing an LLC (Or an S-Corp)
There are, indeed, many benefits to filing yourself as a business, but which business type is specifically right for you and your needs, of course, varies.
Here’s a list of benefits to filing yourself as an LLC:
- LLC’s are taxed as sole proprietorships.
- LLC’s profits can be distributed to all of their partners, which leaves very little money that’s subjected to state taxes (which, of course, is a benefit)
- If you need to keep your profits in your business (again, for tax reasons — talk to your accountant to see what’s right for you), you can do so with an LLC. Here is a list of benefits to filing yourself as an S corporation:
- Anyone who works for an S corporation gets compensated like any other employee of any other company.
There are inherent tax benefits available for any S corporation. Anyone who makes less than $75,000 as an S corporation will be subject to fewer taxes at a corporate rate (than if they were filing as a sole proprietorship or as an individual with no tax benefit).
Regardless of which business option you take, you need to speak to an accountant to determine which option is right for you.
Enjoy Small Business Tax Savings
Every year states change their sales taxes. Some states work to lower the percentage they charge for sales tax. Some states exempt certain items, like personal hygiene and diapers from sales taxes. And most states at least consider finding a way to charge taxes on web-based sales.
This includes collecting sales tax on internet business and the products these businesses sell. As more business is done over the World Wide Web, state capitols realize they are missing out on opportunities to collect from traditional brick and mortar stores and making up for that by taxing web-based vendors.
The Bottom Line
Paying federal taxes is a responsibility that all wage earners share.
While having some level of federal taxes is inevitable, with proper planning you can reduce your tax liability.
Use these tips to your advantage, and minimize your final tax bill.