Tax planning is more complex for business owners compared to an individual even though there are lots of tax planning ideas available for business owners. When we talk about business, a business may be a partnership, small corp, sole proprietorship, or any other business like rental or farm business. Each and every business has its own setup and requirements, and thus a separate tax planning is required for each business.
Further, some of the deductions may depend upon state laws so it would be highly recommended to check state laws before applying these tips.
In this article, we have covered the nine most common tax tips applicable to a business. We suggest you consult your tax advisor before you take the benefit of any tax tips given in this article.
1. Business Setup:
Setting up a business is a very important step and you have to be very careful when you set up your business. This includes the type of business (like s-corp or a partnership), choosing a state of incorporation, state of operations, and federal and state filing requirements. For example, if you start a business in California compared to Nevada state, you would have to pay more taxes. Similarly, if you set up an INC compared to an LLC, you may have less flexibility and more taxes.
2. Separate bookkeeping:
To function business properly and efficiently, a separate bookkeeping system is highly recommended for each business. Any business expenses should be paid only through a business account and anything personal should be paid personally. If you ever have to pay a business expense from your personal account, make sure to reimburse it properly from your business (for example through the accountable plan). This would help you to track everything and you would never lose any deductions to reduce your tax burden.
3. Separate tax liability account:
Setup a separate tax account in your bank and fund it regularly (normally monthly) based on that month’s income applying your marginal tax rate. Make sure you consider federal and state taxes while funding the account. This way you never miss important tax payment deadlines like quarterly dues, extensions, and final payments of taxes, and you would save the interest and penalty on late payment of taxes which is very important for any business. Consult with your tax advisor for your monthly marginal tax rate to start funding the account.
4. Separate Payroll liability account:
Regular payment of payroll and payroll taxes is one of the most important parts of functioning the business properly. While you are paying the wages to employees regularly, it is equally important you file payroll tax returns and pay payroll taxes to the government on time. With a separate payroll bank account, you can set aside required money regularly and pay the taxes and wages. You never miss a deadline as you will have enough money in the account to pay on time. This would save a penalty and interest.
5. Missed deductions:
Even if tracking everything properly, there is a chance that a business miss reporting some of the deductions. For example, a personal cell phone or car is being used for both personal and business purposes. There are various other examples like meals, travel, home used to have some events for business, etc. These are some of the deductions that even though are personal but a portion should be reported to business. From the tax perspective, anything related to business should be reported to the business. If you use a part of your cell phone to make and receive calls from your clients, that is business and you would get that portion deducted from your business. So, identify these expenses and report them properly to your business to get those deducted and reduce the taxes.
Apart from a regular depreciation, you may qualify for a special depreciation which may be up to 100% of the new assets placed in your business during the year. If you identify those assets and report them 100%, you may significantly reduce your overall income during the year and save the tax. You may also go with cost segregation studies for your existing rental properties to report higher depreciation compared to a regular depreciation and save taxes.
7. Qualified Business Income Deduction
A qualified business income deduction allows you to deduct up to 20% of the net income of the business. To get this deduction, your business has to be a Qualified Business per the guidelines provided by Internal Revenue Services. Also, your overall total income can not be more than the specified limit. You can check with your tax professional for the eligibility and limits if you fall under this deduction category.
8. Be prepared in advance:
Start thinking regarding your taxes and deduction in advance. November is perhaps the best time to start exploring your missed deductions and planning the tax. Keep communicating with your tax accountant to decide your estimated tax, additional deductions, and overall tax strategies. Once the year is ended, your window to report deductions is generally closed. Any business payments you make later will generally be considered as a deduction in the next year’s period. So, think in advance and save more taxes.
9. Hire a Smart Tax Planner and Accountant:
A smart tax planner helps you to save a lot of money and also helps you to run your business without stress. You can get proper guidance throughout the year on various items like tax law changes, tax tips, deductions, and payments of taxes. Not only that, but the strategies provided by the planner would help you to plan and achieve your short-term and long-term goals as well. If the tax planner is also a tax accountant preparing your taxes, that would be an additional benefit for you.