Although you have a lot on your plate as a small business owner, you must prioritize tax planning. By making a financial plan to increase your income and decrease your tax burden, you may be able to increase your business profits. Tax planning for small businesses should be done throughout the year. With proper business tax preparation in Clifton Park and Albany, you can avoid surprises comes April 15th. By using the following tax strategies, you can minimize your tax burden:
Think About Changing Your Tax Status
If you own a small business, you have many options to structure your business. These include operating as a sole proprietorship, a partnership, an LLC, an S corp, or a C corp. The structure of your business will impact the way you file the taxes of your business.
If you have outgrown your existing business structure in the previous year, you can switch to a more suitable one. For instance, if you own an LLC, you can file Form 8832 and be taxed as a C corp. However, tax saving should not be the only factor to consider when choosing a small business structure. Before you change your tax status, speak with a tax expert who can help you analyze the costs versus the benefits of such a change.
Leverage Tax Deductions
With the qualified business income (QBI) deductions, you can deduct up to 20 percent of your share of the income of the business. Specified service trade or business (SSTB) owners lose the deduction if they have a very high income. In general, these businesses include service-based businesses where they rely on the reputation or skill of their owners or employers. They include law firms, consulting firms, medical practices, performing artists, professional athletes, accountants, investment managers, and financial advisers.
The QBI deduction can offer a significant tax deduction; however, determining who can claim it can be challenging. The same goes for calculating the deduction itself. Speak with your tax accountant if you believe you might be eligible for this deduction.
Take Advantage of Tax Credits
You can also reduce your tax burdens by leveraging tax credits. These credits directly decrease the tax owed. Consider the following:
- Work opportunity tax credit (WOTC). This tax credit gives you financial incentives to recruit and retain people from specific target groups that have persistently faced serious employment barriers. These groups include felons, veterans, and those who get TANF benefits.
- Disabled access credit (DAC). This is meant to help owners of small businesses offset certain costs related to offering access to individuals who have disabilities. You can claim this credit if your revenue does not exceed $1 million and you have up to thirty full-time workers.
- Health insurance premium credit. If your small business offers health insurance benefits to employees, you may claim this tax credit. If you are eligible for this credit, you can claim up to 50 percent of the premiums paid during the year.
Establish a Retirement Account
You can reduce the taxable income of your small business by establishing or contributing to a retirement account. When it comes to retirement savings, you have several options. Establishing a 401(k) plan before the tax year ends lets you deduct plan contributions when you file a return. If you cannot set up this plan, you can establish a SEP or simplified employee pension plan. Whichever plan you can establish, the contributions you make to it can be deducted. However, tax credits also apply to retirement plan startup costs for which you may also be eligible. Consult your accountant to know if you can take advantage of this tax credit.
