Tax season is quickly approaching. As a small business owner of two six-figure businesses myself, keeping taxes down has always been something that I’ve been focused on and aware of. This can be the make-it-or-break it secret sauce for your small business.
Keep on reading to hear some of the tips and tricks I’ve learned along the way as well as a few of my favorite tax savings strategies available to business owners.
My Best Tips & TricksHire Family Members
- Hire family members.
One of our favorite strategies to suggest to clients is to consider hiring family members for their business, as long as the earnings are for justifiable business purposes. This can reduce the tax burden on your business and sometimes eliminate it all together! A prime example of this strategy is a business owner hiring their child (for justifiable business purposes) and then contributing that child’s earnings to a ROTH IRA in the child’s name. The tax savings on compounded growth in an IRA is immense, when you can start potentially 18 years sooner the savings become even greater.
- Understand what constitutes a deductible expense
Throughout the year, keeping meticulous records of your business expenses and income will be important to maximize your tax savings. It’s usually easy to determine what counts as income for your business, but what about expenses? According to the Internal Revenue Code, business expenses are “the costs of carrying on a trade or business, and they are usually deductible if the business is operated to make a profit.”3 Essentially, expenses that are ordinary, necessary, and reasonably related to the operation of your business can be deducted.3
- Use accounting software to efficiently keep meticulous records of expenses
As a business owner, taking advantage of write-offs will likely result in significant tax savings for you. The best way to be certain you’ll be able to take advantage of your business-related expenses while ensuring tax season won’t be a colossal headache is to use accounting software. For business owners in their first few years of operation, we recommend using Quickbooks or Zoho books.2
- Hire a reputable CPA
As a business owner, the tax strategies & situations you come across will be unique. This fact means you’ll be in a unique position where you’ll face both rare tax problems & exclusive business owner tax deductions/breaks. Hiring a reputable CPA who you know and trust can help you to prepare your taxes during filing season and take actions throughout the year to minimize your bill!1
- Start your own retirement plan
This is a great way to keep taxes down and maximize the compound interest of investing in a tax-deferred or tax-free retirement account. For more information on how to choose the best retirement plan for your business, read our blog The Beginner’s Guide To Choosing The Right Retirement Plan For Your Small Business.
- Utilize Startup Deductions
If you started your business in the last year, you’re in luck! As a fresh startup founder, there may be several deductions/tax breaks uniquely available to you. These deductions are in place to aid new businesses as the costs of startup can be prohibitive. Depending on your situation, you could deduct up to $5,000 in startup costs and $5k in organization costs (as long as your total costs to start the business were less than $50k).1
- Start Thinking About Next Years’ Tax Season Now
As you’ll see with just about all the tips here, the most important thing with tax planning is looking ahead at the big picture. If you haven’t started already, right now is the best time to start planning for next year’s tax season! By planning ahead, you’re able to be more effective in the implementation of your tax strategy. After all, the best strategy is one that optimizes the savings to your lifetime tax bill, not necessarily the current year’s. Sometimes, that means paying a big tax bill now so you can save huge amounts later.1
Conclusion: Why it’s Important to Save
As a small business owner, it’s important to save as much money as possible. Minimizing your lifetime tax bill is a huge way to save on expenses! By doing so, you can increase your financial margin resulting in more personal freedom & growth of your business.
If this article was helpful to you, please consider subscribing to my blog. If you read this article and you’re interested in learning more about how we help business owners to manage their money well, save on taxes, and more, we’d love to have a conversation with you! To schedule a conversation with one of our financial advisors, click the link at the top of the page!
Sources:
1: https://www.score.org/blog/12-small-business-tax-saving-strategies#main-content
2: https://www.shopify.com/retail/small-business-tax-tips
3: https://www.irs.gov/publications/p535
When Daniel is not giving financial advice or managing investments, he enjoys renovating properties, real estate investing, drinking coffee, hanging out with friends, spending weekend trips in his camper van, and exploring the outdoors on a hiking or biking trail in his hometown of Roanoke, VA and beyond.