Pay Less, Save More: Tax Strategies Every Business Owner Should Know

For business owners, tax season can be stressful and overwhelming. You’ve got tax responsibilities and often big payments that come from owning a business. Did you know that with the right tax strategies you don’t have to spend your tax season being stressed out about it all? With these strategies you can often save some money by maximizing deductions and learning to reinvest money back into the business. It will help reduce your tax burden and give you some relief.

At Katherine M Johnson, CPA, we work hard to educate our clients and ensure they know the best ways to pay less and save more. We’ve put together this blog with some essential strategies that every business owner can use for help along the way. Check out these tips.

1. You Need the Right Business Structure

It is important to ensure you have the right business structure for the capacity and growth of your business. The business structure itself can heavily impact taxes and it can impact who is responsible for the tax burden. These are the most common structures:

Sole proprietorship or partnership
LLC
S-Corp
C-Corp

There is no one-size-fits-all solution here, so make sure you understand the differences and operate under the structure that is right for your needs. A tax advisor can help you strategize and make the right decision for your business.

2. Maximize Deductions and Write-Offs for Tax Strategies

How much do you know about deductions or what you can write off as a business expense? The more you take advantage of these opportunities, the more money you can save. One of the best ways to reduce tax liability is to know what can be used as a business deduction and to use those deductions.

Here are some deduction examples:

Office expenses (rent, utilities, office supplies, etc.)
Home office deduction (for those who work from home)
Business-related travel expenses
Vehicle expenses (mileage or actual costs for business use)
Marketing and advertising
Professional services
Education and training

As a business, you likely are already incurring many of these expenses. Perhaps knowing one could be a deduction will give you the opportunity to consider using more of them. When you do claim or use these deductions, it is important to keep detailed records and receipts. This will help cover you in the event you ever face an audit.

3. Defer Income and Accelerate Expenses

One strategy that might be helpful when you’re nearing the end of your fiscal year is simply being aware of where you stand and what you can do to keep yourself in your preferred tax bracket. Tracking and awareness work to your advantage here, as would having a CPA that helps track through the year.

At the end of the fiscal year, you might choose to defer income to keep your revenue lower until the next tax year. Some businesses choose to also accelerate expenses by making necessary expenses sooner rather than later to add to business expenses.

This strategy is all about timing and knowing how you might be able to reduce taxable income to keep you at a lower tax rate.

4. Leverage Retirement Plans for Tax Strategies

There are some great advantages to having and contributing to retirement plans. Not only will a retirement plan help save for the future, but the tax benefits are significant. As a business owner, you have several different options, such as a Simple IRA, 401K, or SEP IRA. It’s important to consider your options and choose what will truly be best for your needs.

These contributions reduce taxable income while also saving for the long-term.

5. Section 179 and Business Depreciation

Section 179 is a depreciation ruling that will allow you to immediately deduct the full purchase of certain equipment in the year that you purchase it. There are very specific requirements and some limitations on this, but it may be an option that benefits you.

In addition, bonus depreciation might be helpful in any given tax year as it allows you to deduct a significant portion of asset costs upfront, rather than spreading it out. Ultimately, these options allow for a higher expense ratio, which reduces taxable income and could reduce your tax burden.

6. Tax Advantaged Health Plans

Offering or providing health insurance can be a great deduction as well. You might consider either offering health insurance with the business covering a certain percentage of the premium or establishing a health reimbursement program. There are tax benefits to both options.

A health reimbursement arrangement, also known as HRA, allows business owners to create a fund where they can reimburse employees for medical expenses on a tax-free basis. There are rules for setting these up and to be in compliance.

If you have health insurance plans and you operate with a high deductible plan, you could create an HSA, or health savings account, to be used towards medical expenses. Contributions to this account are tax-deductible, and they are allowed to grow tax-free.

7. Separate Business and Personal

One of the most important things any business owner can do is keep business and personal needs separated. Those finances should funnel through different accounts and processes in order to keep records clear and distinct.

When you choose to co-mingle funds, you might run into issues like deductions that are not allowed, an increased risk of an audit, or other legal liabilities that cost you money. Instead, open a dedicated business check account, use a business credit card, and keep very good records for everything related to the business.

Tax Strategies for Every Business with Katherine M Johnson, CPA

When you need support with taxes, lean on us at Katherine M. Johnson, CPA. Taxes are a necessary part of doing business, but you don’t have to overpay. These strategies will certainly help, as will being proactive and aware. Let’s work together to keep more of your hard-earned profits in your business.