Almost every business owner dread paying the government more of their hard-earned money. Tax season is stressful, challenging, and arduous, especially for small businesses that already have many on their plate. Taxes also contribute to a significant proportion of the business cost. Hence, no business owner will miss out on the opportunity to save up on their taxes.
Luckily, you can save quite a lot on taxes in several different ways. The key is to lay out a strategic plan for tax deductions. Keep reading ahead to find out about some of the best ways you can save up on your business taxes. Of course, the rules might differ from business to business, but the goal is unanimous.
Know which exemptions you can make
Several business owners are unaware of all the business expenses deductible from taxes. They can help them save a considerable sum of money annually. These include transport bills, mileage, and external expenses of business vehicles. Bills of phones primarily used for business purposes and business equipment such as computers are also avoidable costs to businesses. Even costs of working from home (utility bills etc.) are preventable business expenses.
Business owners must learn and adjust costs amongst each business expense. It will substantially help in saving on business taxes. Even professionals with tax careers advise business owners to begin by identifying their avertible expenses when considering saving on taxes.
Search for a retirement plan
Availing a retirement plan for yourself and your employees is an excellent technique to save on taxes. A retirement plan qualifies you for getting several tax breaks and deductions. However, you need to ensure that the retirement plan is authentic and in line with the IRS guidelines. IRS itself proposes many retirement accounts offers which allow you to take full benefit of tax savings. 401(k) simplified employee pension plan, and 403(b) are a few retirement plan examples.
Some of these retirement plans also let you adjourn paying income tax on savings and taxes on investment. For instance, contributing to a 401(k) plan can allow you to take big tax breaks. In contrast, a 403(b) plan will enable you to switch between investment choices to avail high returns.
Cut down on travel expenses
Here’s an interesting fact about business travel. Businesspersons who travel more tend to pay hefty amounts in tax reductions. However, it specifically applies to business travel and not personal travel. So, the key is to maximize business travel since it is an entirely deductible expense.
To qualify your travel as a ‘business trip,’ you need to ensure you exit your tax home and the time spent on the trip is mainly for business work. You should also pre-plan the journey and guarantee the travel expense is ordinary and necessary, as stated by IRS.
Depreciation deduction of assets
Businesses are allowed to dismiss taxes on depreciable business assets such as machinery, real estate, vehicles, and equipment. There are primarily two types of such deprecation: section 179 and bonus deductions.
Section 179 is a provision by the federal tax code that lets you entirely write off all assets’ value in the purchase year. It is an excellent way to expedite the process of acquiring tax benefits. Bonus deductions, in simple words, refer to a tax incentive that allows accelerating depreciation. These types of deductions require your business asset to be at least 50% used to reap the full benefit of deductions in taxes.
Business vehicles can massively contribute to tax savings. You can benefit from tax deductions every time you visit clients, commute to the office or drive to fulfill office errands. You can either calculate your vehicle expenses by noting down the mileage rate or tracking the actual costs.
The IRS requires you to fully track your miles, business commute, and business purpose. If you fail to record any details, you will not qualify for a tax deduction. Don’t forget to track gas, oil, insurance, and lease payments as part of your vehicle expense.
Write off bad debts
If you have customer payments that are long due, you can write them off as bad debts. Bad debts are deductible from income and save a significant proportion of your income from taxes. Overdue loans made to vendors, clients, suppliers, and employees are also part of uncollectable business expenses. So, you can write them off as bad debts. However, the concept of bad debts is only applicable if your company follows the accrual method.
If you follow the cash method, you can unfortunately not write off any expense or payment as bad debts. It is because customer purchases are not counted as income n the cash method.
Business taxes are capable of eating up most of a company’s profit. Therefore, intelligent business owners are always on a hunt to find different tricks to save their taxes.
While you legally cannot and should not avoid paying taxes entirely, you can search for ways to cut down on tax payments. It will not only increase a business owners’ income but also secure a company’s profitability. Paying attention to tax deductions and tax credits can also severely decrease tax exposure.
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