Ways to Reduce Your Tax Bill As a Business Owner

No one wants to pay taxes, but they're important. Trust me, check out some areas of the world without a tax assessed on income, and tell me if you'd last a month there. So while we accept the fact that we have to pay taxes, let's not pay in any more than we have to.

Use your profit and loss as your primary guide as to what expenses are ordinary and necessary for our business; those are the ones you should use first to reduce your taxable income. Then make sure you take advantage of any auto expense deduction available to you, based on your business and your situation. Also, if business use of home applies to you, that's going to be important to ensure that you're capturing that expense as well. Outside of those direct expenses related to the business, make sure you're also reducing your overall income by your self-employed health insurance deduction if you paid for health insurance out of pocket. And then explore your options for retirement. These are all ways that you can reduce your income as much as possible, so that when the tax rate is applied to your income, you can pay in as little as you owe.

All business expenses must be paid out in the tax year you're filing, so for 2020, you can't use any miles from 2021 or expenses paid for in 2019. But that's not the case for retirement. You can put money into your self-employed retirement accounts (Traditional IRA, SEP, SIMPLE) until the day you file your tax return. If you extend, you have until October 15 of the next year to fund it for the previous year. So there is a lot of power in that because you can contribute to your retirement account and reduce your tax amount owed until the last second before you file. This is always a great lever to pull if you were preparing for a certain amount of taxes owed and you either paid in too much or had too much saved and instead you can use that extra money to contribute to your retirement account for your future self, and then still have money left over to pay the tax owed.

Like business expenses, retirement contributions are far from a 1 to 1 in terms of cash out of the bank and tax savings, but you can still expect to save about 20-25% on every dollar you put into your retirement account. And remember, unlike expenses like rent or payroll, that money isn't gone forever; you're just putting it away for yourself in the future in the hopes that the money will grow in value significantly in the years between now and retirement.

These are items available to most small business owners. None of the expenses above requires any entity change or election made with any government. However, some businesses will also benefit from electing to have their Corporation or LLC taxed as an S-Corporation. Depending on your income level, the consistency of revenue, and your tolerance for administrative work, electing to have your entity taxed as an S-Corporation at the IRS level allows your business to skirt some of the self-employment taxes that are assessed on small business pass-through income. That's because it will require that you put yourself on payroll as an employee of the business, and you pay yourself a salary. Within those salary payments will be your share of the self-employment taxes in the form of Social Security and Medicare taxes. But typically, businesses that are primed and ready to make the S-Corp election can often save thousands of dollars in taxes overall every year. Once you make that election, you have to stick with it for the entity's life. If you abandon the S-Corporation, you cannot elect to be taxed as an S-Corporation for another five years, so it's not something you can turn on and off when it's convenient. So before having the S-Corp conversation with your accountant or lawyer, ensure that you're in it for the long haul and ready for the additional administrative work that comes along with running your entity like it's an S-Corporation.

Видео Ways to Reduce Your Tax Bill As a Business Owner канала ENGAGE CPAs LLC