Reducing your tax liability as a small business owner, is doubtless a priority for you, and understandably so. Thankfully, there are a few tax strategies that you can discuss with your tax advisor to minimize your tax liability now, and for the coming year:
Deduct 20% of your qualified business income
While this may apply to your business, it isn’t automatic, and you’ll need to talk with your tax advisor to determine whether the deduction can be applied or not. Typically for income from pass-throughs, tax laws do limit this particular deduction for certain service businesses.
For the future, despite the potential 20% deduction mentioned above, you might wish to discuss with your tax expert about changing your status from a pass-through business to a C-corporation, as the 2017 Tax Cuts and Jobs Act reduced income tax rates from 35% to a flat 21% for all C-corporations.
Formulate a tax paying plan
Disruptions to your cashflow are not welcome under any circumstances, and the best way of reducing this risk, is by having a detailed idea of the overall outlook for your business for the tax year. Whether this means that you set money aside to cover for unexpected eventualities or arrange for a line of credit to pay the IRS, there are several options open to you. Talk with your accountant or tax advisor about the possibility of paying quarterly estimated taxes for the upcoming year, which could enable you to better manage your tax requirements.
Talk to your tax advisor about a retirement savings plan
Employer sponsored retirement savings plan, such as SIMPLE IRA’s, 401(k) and SEPIRA’s, may be tax-deductible, but you’ll need to discuss your options in detail with a tax specialist, as each plan has different amounts that the employer and employee can contribute, along with different available investment options, and you’ll want to assess how easy they are to set up, too.
If you’re starting a retirement plan for your employees, you may be entitled to a tax credit to help defray that cost, but again, your tax advisor will need to help you understand when you’ll need to establish the plan; some have until the due date of the tax return for 2021, while others must be set up before the end of the year, if not sooner.
While it’s easy to read about tax tips online, there can be no substitute for the experience and knowledge of a tax professional; they can save you hundreds in tax dollars and help you formulate cost cutting, efficient tax strategies to reduce your burden as your business progresses. Engaging with a tax professional is always a sound investment, and there are few small business owners who regret their decision to work with one on a permanent basis. Outsourcing your accounting needs is often the most cost-effective way to engage with tax professionals, since you pay them only for the work they carry out for you.