Each year, more than 627,000 new small businesses open their doors. While those businesses all serve different clients and work in different industries, they all have to pay taxes each year.
Managing small business taxes is a completely different process than handling your personal tax return. If you’re not careful, you could end up paying more on your taxes than you should.
Luckily, there are a few things you can do to create a money-saving tax strategy that will benefit your business for years to come. Here are a few tips to help you get started.
1. Separate Personal and Business Finances
The most costly mistake business owners make when planning for taxes and trying to save money is not separating personal finances from their business. If you haven’t already, create two separate checking accounts.
Only use the business bank accounts for business expenses and your personal accounts for personal expenses.
This will make it easy to keep track of your monthly expenses so your accountant can more easily justify any deductions at the end of the year. Comingling accounts makes it difficult to prove which expenses were for your business and which were for yourself.
When you can’t prove to the IRS that certain expenses were business-related, you won’t be able to claim them as a tax deduction. Depending on the number of deductions you’re missing out on, this could add thousands of dollars to your tax bill.
2. Start Planning for Retirement
One of the best ways to reduce small business taxes is to start contributing to a retirement plan. You’re able to set aside a portion of your pre-tax income, reducing the amount that you’re bringing in over the year. The less money you bring in as income, the lower your tax liability will be.
Though you’ll eventually pay taxes on the money you have in your retirement fund, you won’t have to pay it upfront. This can help you save money and free up cash to reinvest into your company immediately.
Try to implement these plans both for yourself and your employees. You may be able to reduce the amount of taxes owed by opening an employer-match retirement plan program for your full-time team members.
3. Implement a Solid Recordkeeping Strategy
As a business owner, it’s your responsibility to maintain clear records of your profits, losses, expenses, and incidentals. If you’re not already, start keeping track of everything your business spends and brings in.
This should include the wages you pay employees, rent, inventory costs, damaged goods, and anything else that impacts your company’s bottom line.
Keep receipts for all business-related purchases and consider scanning them so you have digital copies to back up your paper documents. This way, nothing can get lost or misplaced.
The more documentation you keep on hand, the easier it will be to save money on your taxes.
4. Invest in Equipment Upgrades
Every year, you’ll find new tools and equipment that can streamline your business’s processes and simplify your tasks. If you’re trying to decide whether an equipment upgrade is worth the expense, the answer is almost always yes.
In many cases, you’ll be able to deduct the full cost of the equipment you’re buying from your business’s gross earnings.
This means you’ll be able to lower your total tax liability anytime you make an investment in your company’s equipment.
Just make sure you’re aware of the deduction limits for those upgrades. According to the experts at Clickandmortaraccounting.com, this changes every year based on current tax codes.
5. Work With an Accountant
While it is possible to file taxes on your own, it’s not always in your best interest. In fact, it can end up costing you thousands of dollars on your taxes if you’re not careful.
This is because the tax code is incredibly complicated. Worse, the code can change every year, keeping you from knowing exactly what’s going on and the types of deductions you’ll qualify for.
The more deductions you miss out on, the more money you’ll end up paying the IRS.
Instead of trying to handle things on your own, work with an experienced accountant and let them help you get the most out of your taxes each year. Remember, they understand the ins and outs of the code and can identify deductions that you might not even know exist.
Just make sure to look for an accountant that’s worked with businesses in your industry. This way, they’ll already know and understand your company’s needs and financial challenges.
6. Review Your Business’s Classification
The way that you register your company and organize it can make a huge difference in the types and amounts of taxes you’re owed. Take the time to review your business’s classification with your accountant.
If they determine that your current classification is the best choice, you’ll be in good shape. However, if they think that switching from a sole proprietorship to a limited liability company (LLC) will be in your best interest, you may want to restructure your company.
They’ll be able to go over the tax benefits of each classification with you.
7. Make Estimated Payments On-Time
No matter how large or small your company is, you’re expected to make quarterly tax payments each year. Missing even a single payment can end up resulting in hefty fines and penalties. Worse, it increases the amount you owe at the end of the year.
Get in the habit of making estimated tax payments on-time, every time. Set up reminders on your phone and make a note of the tax due dates on your calendar so you’ll never miss a deadline.
Building a Tax Strategy Doesn’t Have to Be Tough
Creating a tax strategy for small businesses can seem overwhelming when you first get started. Keep these tips in mind and you’ll be able to make sense of even the most complicated tax situation without overpaying the IRS.
If at any point you feel confused by the tax process, reach out to your accountant and get help. They’ll get you back on track so you can keep saving money and lowering your tax liability each month.
