7 Tax Planning Strategies for Small Businesses

As tax filing season approaches, small business owners start to panic. Some haven’t planned for taxes in their financials, whereas others aren’t aware of the changing tax slabs. After all, navigating through State, Federal, income, corporate, and sales taxes is no cakewalk. Small business tax planning is a crucial task to get right from the beginning.

Image Source

While the taxation world might seem complicated, there’s no escape. Tax planning is the only way to minimize tax liability and save the company from hefty penalties.

So, the question is how to plan for taxes. Every business must pay a certain percentage of gross income as tax to the state government. But fortunately, there are a few strategies that can help in reducing the overall tax burden. 

If you are new to the tax world, let us help you. Here we have listed seven tax planning strategies for small businesses to lower their tax burden. 

1. Leverage Tax Credits 

Every business has an opportunity to leverage tax credits and reduce the amount of tax owed. Here are a few ways to consider. 

• Disabled access credit (DAC) helps business owners scale down on costs associated with providing access to disabled employees. It offers a credit of up to $10,000, which you can claim if your business revenue crosses $1 million. 
• Employers can apply for an employee retention tax credit (ERC) to reduce their tax liability on salaries and wages. Companies can take 70% credit of an employee’s qualifying pay every year. As a result, it also lowers the social security tax liability. With these ERC benefits, every small business owner can save on taxes. 
• Does your business provide health insurance? If so, you can claim a tax credit and offset those costs. However, there is a qualification criterion; thus, tick all the boxes before claiming your tax credit. 

2. Select a Business Structure Wisely

Every entrepreneur has to select a structure for the company. Some begin as sole proprietors, whereas others bring in partners or form a company. The structure determines your tax filing strategy. Let us explain how it impacts your small business tax planning. 

Sole proprietors and partnerships only have to pay tax on their income, waiving off the corporate and sales tax from their financials. The company’s net revenue passes through the business owner’s tax liability. On the other hand, companies must follow the tax regime as per Form 8832 with the IRS. Depending on your state, it requires owners to file for corporate tax, which ranges from 21%-37%. 

3. Shrink Your Gross Income 

Every financial statement reports two incomes – gross and net income. Gross income is when you apply the tax rate and fulfill the obligation. Likewise, net income is the money distributable to shareholders. Therefore, employers should consider shrinking their gross income for tax planning as it will automatically reduce tax liability. 

These costs include capital gains, investment returns, and retirement proceeds. How about you increase these expenses? You can offer contributions to health saving accounts or increase retirement contributions. It will bring down the gross income, reducing the tax liability. 

4. Depreciate Your Assets 

Most entrepreneurs don’t account for depreciation in their financials, considering it a non-cash expense. However, even though you have incurred the cost of an asset already, accounting principles suggest distributing the cost over the asset’s useful life. Therefore, you must include depreciation as an expense in the income statement. It will reflect the asset’s true and fair value while decreasing your taxable income. As a result, the tax liability will also decrease, leading to tax savings. 

The depreciation amount depends on your selected method – straight line or reducing balance. You can analyze both techniques to determine which will maximize the tax deduction in the long run. That way, you can maximize tax savings with a non-cash expense. 

5. Review Accounting Methods

The International Accounting Body gives entrepreneurs a choice to select their accounting method. Depending on your business needs, you can opt for the cash or accrual method. 

With the cash method, you will report all the money you receive and incur expenses in the same year as you pay them. It is only available to businesses that have receipts of more than $25 million in the past three years. The accounting method is based on the accruals concept; you report when you incur costs. It aligns the cash movements with financial statements, saving taxes on accrued payments. 

The other option is the accrual method. It enables entrepreneurs to record income and expenses in the same year. That way, you can carry forward your tax obligations and pay them with sufficient funds. 

6. Keep Up with Changes in Tax Laws 

The world of tax is changing at a fast pace. New legislation and laws are emerging quarterly to ensure tax policies align with economic conditions. In this evolving landscape, business owners must keep up with changes in tax laws. For example, many countries signed the Inflation Reduction Act last year to provide provisions for companies struggling to make ends meet. It reduced the corporate tax rate by 15%, but that applied only to adjusted financial statements of companies having less than $1 billion in profits to shareholders. 

Similarly, the tax leverage provided during Covid-19 has been removed by most states, requiring companies to pay tax in full. Some countries have also changed the tax slabs following the progressive taxation scheme. 

7. Offer Fringe Benefits to Employees

As a small business owner, increasing employees’ wages will also increase your tax burden. After all, the employment tax costs will skyrocket. The only way to get around this is by offering fringe benefits as part of your staff’s compensation. Here are a few tax-exempt benefits which you can consider. 

• Medical insurance
• Disability insurance 
• Tuition-free reimbursement 
• Student loans
• Employee meals

These fringe benefits will act as your tax deductions in the financial statements. But, at the same time, it can boost employee morale and job satisfaction. 

Final Thoughts 

From calculation to filing, aligning taxes as you do your small business tax planning is a time-consuming and challenging endeavor. But every entrepreneur must fulfill the tax obligations to save himself from hefty penalties. It might seem daunting, but a few tips and tricks are handy. You must align your tax deductions and credits with financials to reduce tax liability. Likewise, keep up with tax laws, review your business costs, and charge depreciation to reduce the tax burden.