What are the best tax avoidance strategies for small businesses?
From using quality receipt tracking software to making wise tax election decisions, here are 7 answers to the question, “What’s a good tax avoidance strategy for a small business?”
- Use a Quality Receipt Tracking Software
- Contribute Pre-Tax Dollars into Retirement Accounts
- Find Specific Grant for Your Business
- Maximize Your Tax Deductions
- Help An Employee With Student Loans:
- Reevaluate Tax Incentives
- Make Wise Tax Election Decisions
Use a Quality Receipt Tracking Software
It is easy to keep track of the major expenses for deduction purposes, but the little ones often fly under the radar. That is why you should use receipt-tracking software to make sure you account for every penny spent. Small businesses have hundreds of little expenses a year that seem insignificant, but over time they can add up to a great deal of money. If not tracked, these can decrease your deductions.
Using a quality receipt-tracking software can organize all those little receipts into a cohesive and understandable system for tax purposes. So, whether it is that gas receipt for when you picked up equipment, those restaurant receipts for when you took that potential client to dinner, or the receipt for when you had to buy some extra office supplies, having receipt-tracking software can account for it all and provide you with a major deduction at tax time.
Contribute Pre-Tax Dollars into Retirement Accounts
One way small businesses can earn significant savings without breaking any laws is by contributing pre-tax dollars into their retirement accounts, such as IRAs or 401(k)s, starting at the end of each year before their taxes are calculated. Doing this reduces taxable income, resulting in lower overall payments due come April 15th.
Find Specific Grant for Your Business
For small businesses looking to save on taxes, one of the strongest strategies is to research and apply for grants.
While many assume that only large companies are eligible for this kind of assistance, with some digging, small business owners can often identify grants that could help them reduce their expenditures on taxes. By qualifying for such grants, business owners will not only be able to save a considerable amount of money but also invest it in building the infrastructure and strength of their businesses.
Additionally, depending on the nature of a particular grant, there may be additional features or benefits attached that can further boost the growth potential of any enterprise.
Maximize Your Tax Deductions
One of the first steps in any tax avoidance strategy is to maximize your deductions. Make sure you are taking advantage of all allowable deductions, such as those for interest expenses, business mileage, and other operating costs. It is also important to understand the different tax benefits associated with different types of business structures, such as formations like sole proprietorships and corporations.
Steve Rose, CEO, Money Transfers
Help An Employee With Student Loans
A clause allowing employers to help with student loans was included in the CARES Act, which was approved by then-President Trump in 2020. Previously, if an employer paid back a portion of an employee’s student loans, the employee was required to file a tax return since the payments were considered to constitute income.
The CARES Act has a provision that permits employers to repay employees’ student loans without paying payroll taxes, and it also exempts the repayments from the employees’ taxable income. This clause, which is still in existence through 2025, gives companies a chance to win over their staff while simultaneously saving money on payroll taxes.
Reevaluate Tax Incentives
The reevaluation of tax incentives, being one of the primary forms of tax avoidance, is an excellent strategy for small businesses. This is because this practice will help your small business to pay less taxes according to current laws and also enable you to have a deeper look at the taxable finances of your small business.
Check if there are tax incentives or any exemptions related to your small business’s activity by simulating different taxation scenarios, with the aim of finding out if there is the possibility of having cases of offsetting tax credits or chances of fitting into some incentive.
Make Wise Tax Election Decisions
Your taxable income may be decreased by applying various tactics to your business expenses. For instance, under the 2018 tax reform, you can deduct up to $1 million of the initial cost of purchasing new business tools or machinery. However, you might want to think about depreciation as an option for new enterprises or those that aren’t yet generating a profit.
You can deduct the cost of your purchase over several tax years rather than all at once due to depreciation. If you anticipate an increase in revenues that will put you at a higher tax rate, that is advantageous. Consult an accountant before taking any deductions because the IRS carefully examines insurance deductions.
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