Top 5 Ways to Slash Your Tax Bill This Season
As the year comes to a close, business owners still have a few opportunities to slash their tax bill. Shrinking their profit margin will help businesses legally position themselves to have a lower tax burden. Some ways to accomplish this objective include when they:
1. Decrease Revenue
Small businesses are taxed on the profits they have actually earned, which represents the remaining funds after all expenses are paid. One simple way to lower the tax bill is to decrease revenue. Consider deferring payments received in December until the first part of January, and give vendors and customers a break by sending out invoices later in December, which also gives them less time to pay by the end of December. These methods work for businesses that use the cash-method accounting option. For accrual method-businesses, business owners may want to hold off on providing their goods or services until the New Year.
2. Pay More Bills
At the same time businesses decrease revenue, they should also look for ways to increase their expenses. Business owners should pay as many business-related bills as possible during December, including cell phone bills, rent, utilities, insurance costs, professional fees or others. These bills can often be prepaid, or more than one month of service can be supplied ahead of time. Businesses may also want to pay other expenses, such as advertising expenses or other expenses that will likely need to be paid in the first quarter, and the costs to train employees or purchase handbooks. The payment amounts can be used to deduct profits from this year rather than having them affect next year’s profits.
Many business owners do not pay themselves a salary when they are starting out. However, IRS regulations allow business owners to pay themselves a reasonable salary that is taxed as ordinary earned income. Additionally, business owners can usually receive dividends, at a lower rate, from the profits of their business.
3. Increase Capital Expenditures
Businesses may also wish to purchase items that the business will need in the following year. Such purchases may include leasing a vehicle, buying an expensive piece of property, acquiring office equipment or making another capital expenditure. These items should be placed in service immediately to avoid any tax issues. Business owners may also want to stock up on office supplies that they will need, including ink cartridges, stationery, copy paper and pens.
Businesses may also need to repair equipment and can generally include these expenses in the year the repair is made. Businesses may elect to make a partial disposition if part of an asset was replaced during the year, which allows the business to recognize a loss on that portion of the asset. Small businesses can take advantage of repairs, maintenance or improvements to buildings under safe harbor rules, if the cost is less than $10,000 or two percent of the building’s adjusted basis.
4. Maximize Retirement
Small business owners have a variety of retirement tools that they can use for themselves, including Simplified Employee Pension, SIMPLE IRAs and 401(k) accounts. Business owners can shelter more of their income through these mechanisms while allowing for a tax deduction for these contributions. Employers may also want to look into providing employees with a retirement savings opportunity.
5. Contribute to Employee Benefit Plans
Rather than offering employees raises or bonuses, employers may want to consider contributing to employee benefit plans, such as contributing more to employee health insurance costs. When an employer gives a raise, the employee only sees a portion of that raise due to the FICA tax, Medicare tax and income tax on those wages. At the same time, the employer pays its share of FICA, Medicare and other taxes. Contributing in this manner saves both parties from having to pay additional taxes, and it lowers the tax bill.