Tax planning is necessary for budding businesses. It is a vital part of your business strategy that can save you thousands in deductibles. But, some companies leave this significant task to the last minute. So, things become very stressful for business owners. Furthermore, organizations pay more than they should and have to go through a painful audit due to this strategy.
The best way to deal with taxes is to plan each and everything for the financial year. There should be a well thought out plan to guide the company throughout the year so that all decisions maximize tax deductibles. Some companies hire experts to guide them through the choppy waters of taxation.
While it is always a good idea to have a professional at your side, it is not a requirement. With a bit of grit and consistency, you too can plan for success.
Just read through our tax planning tips to help you with your new business.
Decide your entity type:
Choosing a business entity is the first step to reduce your tax returns. However, most people avoid doing this as they are apprehensive about the money they would have to spend to form a legal entity. But, research suggests that registering the right business entity can save you money in the long run. According to Forbes.com, you can save up to 40% in taxes annually by setting up a corporate entity.
There are four entities for small businesses:
- First is the sole proprietorship. Most small businesses are sole proprietorships since they do not have administrative requirements such as board meetings. Nevertheless, these companies are the most audited in the world since there is a higher chance of fraud.
- The second type is C Corp companies that have the issue of double taxation. They get taxed first on profits and secondly on dividends.
- The third is S Corp, and the last is LLC. LLCs are legal entities, but they are the best option since they limit the liability of owners. Therefore if you get sued, you can protect your assets.
Hire a professional:
Not having a professional by your side can increase stress and cost you more in the long run. The thing is that most of us are unaware of the penalties we might incur due to seemingly innocuous decisions. Having the right advice at the right time can save you thousands in taxes. Therefore, it is vital to hire accountants who have the right experience in specific jurisdictions.
International companies must be cautious when hiring a tax firm since different countries have different accounting standards. Such businesses need to hire professionals experienced in international accounting standards such as the french gaap, which provides a comprehensive guide for taxation, accountancy, and audits.
Hire family members:
Hiring family members can reduce taxable income in some cases. Companies that hire families are exempt from several taxes.
American employers usually pay Social Security and Medicare taxes for their employees. Still, you won’t have to pay these taxes if you hire kin. You can also pay lower amounts to minor children, so this is another way you can reduce your taxable income. Even so, you have to pay reasonable compensation to the family member. Hence, remuneration falling below the standard of ‘reasonable income’ will be suspect in tax authorities’ eyes. Furthermore, employers should always be mindful of labor laws when hiring minors. Ignoring these laws might lead to investigation and prosecution.
Focus on your car expense:
Small business owners often use personal cars for their businesses. Whether you run a food business or a moving business, chances are you use your car most of the time. If you are drowning in gas bills, then we have got news for you. You can deduct any transportation expenses from your business taxes as long as they are attributable to your business. There are two ways you can calculate how much of the mileage you can deduct from your tax. One way is to track your expenses and subtract the percentage credited to your business. Or you can track your mileage and minus tax from it at the rate of 57.5 per mile for 2020.
The expense rate is feasible for those who have other expenses, such as monthly installments and insurance. Mileage deduction is better in some cases if you have electric cars that do not have gas expenses. Choose the method most favorable for you.
Deduct Home office expenses:
Increasing numbers of small business owners are working from home nowadays. The reason being that they can avoid high rents and commute by working from home. If you work from home, then you might be eligible for a tax deduction. But, this option has a bad rapport among business owners. People are afraid of claiming this tax deduction. They are worried that it might attract undue attention from audit authorities. While that may be true, you do not have anything to fear if you have the right records to back you up.
There are some prerequisites for a home office to qualify as a tax deduction. First, you must use your office exclusively and regularly as the principal place of your business. Or, you have to use it as a place where you solely and frequently meet with clients in the course of your business. While it is unnecessary to have a separate room as an office, you need to have a separately identifiable place to conduct your work. Moreover, your office should be the principal place of business.
Keep track of expenditures:
The biggest headache when filing tax returns is keeping track of spending. No one wants to deal with shoeboxes full of receipts when filing their taxes, but that is where they eventually end up. You might even miss some expenses because you misplaced the bills.
So, how can you avoid a similar fate? Track all your spending as it happens and go paperless with the help of accounting software.
Moreover, Some of these platforms also can attach bank account and credit card details to make it even easier to keep track of spending. Certain apps can capture and store receipts in one place with the help of artificial intelligence. Just take a photo of your bills, and that is it. So, come tax season, you can get a report of your spending with the click of a button.
Keep in touch with any developments:
Things in this industry change fast. Your previous tax strategies might not pay you as much as they did last year. Or there might be some reforms that have changed things for your business. Keep in mind that we do not expect you to become an accountant overnight. But you should know about the income tax rates for the current year and new laws in the sector.
If that is too difficult for you, then consider hiring an expert to help you out.
Starting a new business can be scary on its own without adding the pressures of calculating taxes. Most new business owners are dealing with razor-thin profits, so they must save money where they can. Tax deductibles are the easiest way you can conserve some of your hard-earned cash each year. There are some small tips that a beginner can adopt without a degree in accounting. You can claim deductibles for car expenses and home office expenses. You can also hire a family member to reduce taxes. Or you can forego the headache of doing all that by hiring an accounting firm to take the burden off your shoulders. Whatever you do, make sure you think it through since any decision can have a long-term impact on your business.