For most Americans, the deadline for filing taxes is April 15. Businesses, however, should file forms 1097, 1098, and 1099 among others, by February 28. The deadline moves to March 31 if they file electronically.
If you are a business owner, do you know your tax deadlines? For first-timers, it can be nerve-wracking, and you might be making many mistakes along the way.
You might be paying more taxes than necessary. As such, you must learn how to pay fewer taxes using lawful and ethical methods. Keep reading to discover what you can do to lessen your tax burden before the deadline.
1. Understand Your Taxes
The first step to knowing how to pay fewer taxes is to understand them. Know what taxes you have to pay, what exemptions you qualify for, and when to pay them. Some of the types of business taxes you have to learn are:
- Business Taxes
- Employment Taxes
- Sales Taxes
- Excise Taxes
Taxes for businesses can be complex, especially when the laws change over the years. Outsource tax preparation services to explain these considerations.
2. Know What Deductions You Can Make
Some business owners miss out on saving on taxes because they do not know they can deduct some expenses from their taxes. Legally speaking, most business expenses are tax-deductible. These include:
- Cellphone bills
- Expenses and mileage for personal vehicles
- Work from home expenses, such as rent, mortgage, and utilities
- 50 percent of meal and entertainment expenses
- Travel expenses
- Cost of customer gifts
These exemptions must relate to your business to ensure your eligibility. For example, you can only include your bills if you are using them for your business. The meal and entertainment expenses qualify when they are with a client, employee, or such.
3. Keep Good Records
An important reminder is you must keep records to claim deductions. Without proper recordkeeping, even legitimate expenses might not become deductible. When you keep your books organized, you can better see the financial health of your business.
Create a system for tracking your income and expenses. Keep the receipts for every type of expense and file them by category.
Explain any new system and policies to your employees. That way, they can also keep records of their expenses, such as mileage and meals.
4. Make Smart Tax Elections
Aside from knowing the “what,” you should also know the “when” and “to what extent.” You can work with tax professionals to make wise decisions involving your taxes.
For equipment, you can claim a depreciation allowance over five years or longer. It also applies to business machinery, vehicles, and even real estate.
However, Section 179 allows you to deduct the entire cost in its first year of service. Another type of this accelerated depreciation is bonus depreciation. In 2018, the Tax Cuts and Jobs Act increased the tax break from 50 to 100 percent of the cost.
You should also know the “how” in claiming deductions. An example is a personal vehicle you use for your business.
There are two ways to do this: one is to claim the actual costs. The other is to use the IRS standard mileage rate. Check which option will give you a higher write-off.
5. Know When to Make Purchases
Are you planning to expand your business a few months from now? If it is nearing the end of the year, consider making advanced purchases. That way, you get a tax deduction in the current year.
The same goes for non-tangible expenses, like a marketing campaign. You can prepay some costs you will spend in the next several months to get a deduction now.
6. Invest in Your Employees
One way to reduce your taxable income is to reinvest your money in your employees. All employee compensation should be tax-deductible, such as:
However, they should fit the criteria. They should be a necessity and payment for a provided service. The compensation should also be a reasonable amount.
Instead of a huge raise, consider contributing more to their health insurance. An increase in income means your employees will pay more taxes. The same applies to your employer’s share, making it a losing situation.
The added benefits are happier employees and increased employee loyalty. You retain valuable staff members while enjoying lower tax rates.
7. Fund a Retirement Plan
You can further take care of your employees by funding a retirement plan. You can also contribute to one for yourself.
Make sure it is a qualified plan, like IRAs, 401(k), and 403(b). In 401(k), for instance, you can pay up to $57,000 in contributions.
Aside from employee loyalty, the advantage is you can claim a tax deduction. You can also defer tax on earnings on contributions, but you will pay for taxes after withdrawing your earnings.
8. Get Tax Credits
Keep yourself updated on the currently available tax credits. It is the government’s way of encouraging a specific behavior from a business.
Tax credits are different from tax deductions since they are a direct reduction in tax liability. Deductions, on the other hand, are a reduction in taxable income.
You can get tax credits for hiring more employees, going green, and more. The Indian Employment Credit, for example, urges businesses to hire Native Americans.
Employers providing paid medical and family leave also qualify for a tax credit. They can get 12.5 to 25 percent of the wages paid to employees.
Talk to a Professional About How to Pay Less Taxes Now
As a bonus tip: ask a professional how to pay fewer taxes. Every situation is unique, and a tax advisor can tailor their advice based on yours. They can help you save time and money, so consult one before you make any big decision.
Still, determine whether paying a professional is cost-effective. Search for a reputable tax advisor to make the most out of your investment. The best way to start is to look for online reviews and other quality indicators.
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