How you can prepare your Small Business Tax Strategy
The majority of small business owners value every dollar that goes in and out of their business. How could they not, with their livelihood dependent upon their revenue generation and profit margins.
For 99% of small business owners, their biggest expense is there tax bill. Therefore, it’s only natural that small business owners want to lower their tax liability while optimizing their income.
Thankfully, there’s still plenty of time to make year-end tax preparations to reduce federal and state income tax liability for 2022 before filing in 2023. To make it clear, now is the time to prepare for 2023 taxes.
Once the calendar year is over (unless the business files on an alternate schedule) it becomes much harder to implement tax advantages. That’s why it’s so important to implement a solid tax strategy the year prior to filing.
But don’t worry just yet; we’re only a little more than half way through the year, and developing a solid small business tax strategy doesn’t have to be complicated.
So consider this your full guide to developing a tax strategy for your small business taxes.
Tax Strategies for Small Businesses
It is safe to say that managing tax filings is not enjoyable for every business owner. That’s why this compilation of small business tax strategies exists to help make the process a little easier.
Don’t undervalue the significance of handling business taxes annually. Federal, state, and municipal government agencies monitor the tax status of companies and flag corporations that are behind or late in filing.
If a corporation is extremely delinquent in filing taxes, the consequences could be both inconvenient and expensive; like paying thousands of dollars in fees, back taxes, and/or undergoing audits.
Here are a few tax preparation strategies for small businesses that are helpful in developing a fully secure and robust tax strategy that can keep businesses compliant and up to date on filings.
Use tax credits to your advantage.
Tax credits help reduce total tax liability. IfBy taking advantage of tax credits, small business owners are able to subtract a specific amount of money from the total tax bill. Things like: going green, employing people, and granting disabled employees and the general public access to your place of business (following ADA guidelines), among other things, make businesses eligible for tax credits.
The General Business Credit (File Form 3800), which allows for credits from previous yeas to be carried forward to the current year – as well as count the current years credits, includes the ability to claim most individual and business credits.
Therefore, most business owners can benefit from tax credit options just by using this one form effectively.
Make Sure the IRS Has Received All of Your Income
Even though you want to lower your tax liability, falsifying records and withholding income information is not the way to do it. Tax evasion and fraud can lead to massive fines and even incarceration in drastic cases.
It’s important to note that the IRS receives a copy of every 1099 form you obtain. Which means that even if you don’t report it, the IRS obtains a copy regardless; either from your client, vendor, etc. So the income claimed on filings needs to be accurate and match what is being reported by other parties involved with the business.
Additionally, business owners must disclose any income that is not shown on 1099 documents. The Small Business Administration provides a manual on ‘Tax Planning and Reporting for a Small Business’ as part of its Financial Education Curriculum, which may be helpful in learning all the rules involved with keeping filings legal and compliant.
Increasing Deductions
One of small business owners’ most significant tax errors is not making full use of their tax deductions. You have the right to deduct certain expenditures, losses, and expenses from the taxes you owe if you operate a business.
These deductions are essential to keep track of because they can drastically reduce your tax obligation. Maintaining accurate company records, receipts, and other supporting paperwork for every deduction you claim is crucial so that the IRS can verify your costs.
Delay or Increase Your Income
For their records and tax filings, many small enterprises employ the cash method of accounting. When using the cash method, a business records income as soon as it is received and expenses as soon as they are paid or when money is exchanged.
However, consider transitioning to accrual accounting – where revenue or expenses are recorded when a transaction occurs versus when payment is received or made. That way excess income can be deferred to the next following year, so the tax liability for the current year remains low.
Consider Changing Your Tax Status
As a small business owner, there are many alternatives for how to set up a company. Business owners can conduct business as an individual (sole proprietor) , partnership, limited liability company (LLC), S corporation, or C corporation.
Business taxes are impacted by the business structure selected. If a company has outgrown its existing organizational structure, then perhaps it’s time to switch to one that is better suited to the company’s circumstances and overall small business tax strategy.
Prevent these Tax Filing Errors
Knowing what taxes are owed each quarter, calculating your tax deductions, and preventing typical filing mistakes are all crucial components of a successful tax planning strategy. Specific errors made by small business owners include the following:
Failure to maintain accurate records and receipts. Keeping track of each purchase made for the company during the entire year is crucial. Maintaining receipts (either digitally or on paper) is key if you (the owner) or the company are ever audited. This also helps with ensuring all deduction are properly accounted for to optimize tax deductions.
Don’t forget to send in payments every quarter. As a business owner estimated tax payments are due every three months. If the payments are not made, it makes filing taxes for the business overall more difficult. So to avoid unnecessary issues and penalties, mark the quarterly tax payment due dates on a calendar and deliver the entire amount by those dates.
Keep personal and professional finances separate. Separating private and corporate funds will help avoid accounting and record keeping mistakes and save a lot of time on the backend when completing and submitting tax documents.
Without keeping personal and professional expenses separate, it becomes easy to overlook a business deduction or mistakenly classify personal income as business.
To ensure that business income and expenses are transparent and straightforward, maintain a separate business bank account and utilize a different business credit card for transactions.
What are the taxes for small businesses?
Your tax rate is a flat 21% if your company is taxed as a corporation.
If your company isn’t taxed as a corporation, you will be the one who pays taxes, not your company. Therefore, you must refer to the tax tables to determine which tax bracket you are in.
It’s critical to keep in mind that you’ll pay taxes on your self-reported net income when operating a business. Remember that if you anticipate owing more than $1,000 in taxes in a calendar year, you’ll often need to make estimated quarterly tax payments in many types of small business forms, including sole proprietorships, partnerships, and S corporations.
Their payments are typically due in April, June, September, and January.
As a good rule of thumb, set aside 25 to 30 percent of your net business income to ensure you have the funds necessary to pay your federal income taxes. To avoid using these funds on other operating costs, put the funds dedicated to tax payments in a separate bank account, or a separate bank, from the one regularly used for company transactions.
Depending on how your company is set up, there are two excellent ways to save money for taxes:
For companies with a steady flow of revenue, you can just set up automatic bank transfers to send money into a secondary savings account regularly out of your primary checking account.
Businesses with variable income should manually initiate these transfers whenever an invoice is paid.
Further considerations
Are you working as a freelancer?
According to Lawrence DeLisser, a CPA and business consultant, “every dollar you earn is taxable” if you begin a side business or freelance full-time. “Yes, even if you only make $600 a year.”
That’s because you are regarded as a small business by the IRS. Additionally, self-employment taxes and income taxes are due by small business owners. (When you have W-2 employment, your employer deducts these taxes for you.)
After deducting any necessary business expenses, budget on paying approximately 25 to 30 percent of any income earned. You must estimate these taxes and deliver them to the IRS every quarter. If you don’t, interest and penalties will be applied.
The Bottom Line
Before making any important decisions about your small business tax strategy, exploring these tax planning tactics with your tax advisor is crucial.
Every organization has a different tax status. However, these techniques ought to assist you in getting ready for your year-end tax planning meeting and learning more about how to reduce taxes for your small business.
Now that you are aware of the objectives, advantages, and typical errors in tax planning, you can see why arranging your company to be more tax effective is a win-win situation.
If you are in need of a small business tax strategist and CPA, contact us at Speed Financial Group. Our dedicated team of tax professionals is here to educate you on the benefits and strategies of tax preparation, and get you the lowest tax liability with the highest bottom line.
Schedule a consultation today!
Also read “Best Softwares to Use to Keep Records for Your Accounting“
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