Whether you’re looking to free up some money to market your business, plan for expansion, or put a little in your back pocket for a rainy day, there are plenty of smart ways for entrepreneurs and small business owners to save money. One way is to minimize your tax liabilities. Consider these tax tacks to make the most out of your business’ financial situation.
1) Choose the right business entity
Don’t overlook this critical first step; your chosen business entity will have a significant impact on your ability to minimize taxes. Sole proprietorships are one of the cheapest to form, but they require you to report profits and losses on your personal tax return. Corporations, on the other hand, have their own tax benefits and drawbacks — like the possibility of double taxation, where the business pays taxes on annual earnings and the owner is also taxed on income earned from the business. Consider your structure carefully. If your situation changes, you may also be able to change your business entity for a more favorable tax structure.
2) Deduct your startup costs
Take advantage of the IRS tax break for new businesses. When you pay for things like equipment, supplies, and operational fees, the deduction lets you take back up to $5,000 of the initial startup costs in the first year of business. That’s a fairly straightforward way to reduce your taxable income.
3) Start a retirement plan
If your business is more established, try contributing to a retirement or pension account to shelter more of your income from taxation. IRAs are commonly used to save for the future, and you can make contributions of up to $5,500 per year. You won’t pay tax until you withdraw money from the plan upon retirement.
4) Set money aside for healthcare
In a similar vein, find out if you might be eligible for a Health Savings Account (HSA). This is an excellent way to reduce your taxes and set aside money for your future healthcare needs. It’s always a great idea to anticipate rising medical costs and save for unexpected expenses.
5) Use the special depreciation allowance
When it comes to bigger business purchases, you generally have to depreciate the item and take a portion of the cost on your tax return each year (instead of deducting the entire cost). You can deduct more by using the special depreciation rules. With many types of tangible property, you can take 50 percent of the item’s cost as a deduction in the year of purchase.
While not strictly a tax hack, we recommend keeping meticulous financial records and always filing your taxes on time. Beyond that, every business is different — you may have more potential tax savings at your fingertips. To find out how, contact the Petry Law Firm, PLLC and connect with a knowledgeable tax lawyer. We will help you explore the tax saving opportunities available to you.
Petry Law Firm, PLLC
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