Small business owners often face stiff competition, demanding customers and rising labor costs. When tax season arrives, it may cause unnecessary stress over financial worries.
Following these tips below will help small business owners prepare to file taxes this year and plan for the next year.
Small businesses are empowered to lower their tax bills by accelerating current deductions. For instance, charitable contributions are an excellent way to gain strategic deductions. This means business owners can drastically increase their benefits by donating appreciated products or property instead of cash.
Even better, assets that are owned for over one year automatically qualify for double tax benefits.
Thus, business owners may deduct the property’s market value on the gift date to avoid paying capital gains tax on the accumulated appreciation. Keep in mind that business owners must retain receipts for any tangible donations or financial contributions.
There are other expenses that may also be prematurely deducted, such as medical bills, pending property tax bills and estimated state income tax bills. Finally, small business owners should consider itemizing deductions instead of claiming the standard tax deduction.
Business owners sometimes forget that they can legally defer income to the following year. Although it’s impossible to delay paying wages and salaries, some business owners may be able to defer year-end bonuses to the next year. This is legally permissible as long as the company has an official policy or the standard practice of deferring bonus payments to the following year.
Small business may also defer income by taking capital gains in the following year instead of the current year. They may also make necessary large purchases, such as equipment upgrades, in order to maximize deductions.
On the other hand, anyone is self-employed or a consultant has more leeway and can delaying billings until the end of December so they won’t receive payment until the next year. When deferring payments or billing, be sure to thoroughly analyze if the projected adjustments will push you into a lower tax bracket for both the current and following year. It makes little sense to defer so many payments that you get pushed into a higher tax bracket the following year.
Planning and Preparation
Budgeting and tax planning are continuous tasks that should be completed all year round. Be sure to regularly run reports and review them with a financial advisor in order to strategically plan for the following tax year.
For example, consider creating an annual sales forecast that is based on concrete evidence which supports the estimated growth. Use historical numbers in conjunction with your sales pipeline to generate a projected growth rate. In addition to this, forecast expenses, such as rent, payroll, supplies, advertising and unexpected costs. These numbers can be extracted from accounting software programs and then combined with the projected sales numbers.
Tax-deferred retirement accounts are an excellent way to reduce current income. Be sure to put in the maximum amount allowed. Plan on hiring family members because small business owners may pay a minor child thousands of dollars that will not be taxed the same as regular income.
If a small business owner hires their spouse, then health care payments may be deducted as a business expense. When it comes to transportation, keep in mind that there are two deduction options: auto expenses or mileage. When gas prices are high, the second one is actually a better deal.
Overall, small business owners should consider last minute deductions, payment deferrals and proper planning for the following tax year.