If you were ever to say that you like paying taxes, people would likely look at you as if you were crazy. Let’s face it; no one likes to pay taxes. As a small business owner, your goal should be to pay as little as possible.
Many small businesses pay more than they should simply because they have a bad accounting system. It may seem tedious, but keeping track of every penny spent and mile driven can help you get the easiest tax deductions. If you are not doing this, then you need to start or hire a firm that specializes in small business taxes like Accubiz.
Firms that do this are there to help you find every possible tax deduction and break that you can receive. They will help make sure you have a good accounting system in place so you do not miss any expenses or overstate your income. Below are three simple tax-saving strategies that every small business owner should consider:
1. Retirement Plan
Having a retirement plan will allow a tax deduction without your money ever leaving your hands. This creates tax savings by simply moving money from one pocket to another. Regardless of your company size and number of employees, you can set up a retirement plan that allows you and your staff to defer income to later years. However, you will need to consider how much you want to fund your employees’ retirement accounts.
Contributing money to their retirement plans will reduce their current yearly incomes and will be invested tax deferred until retirement. There may even be a tax credit for the start-up expenses of the plan.
Consulting a financial expert that has experience in small business retirement plans can be beneficial as they will have helped other business owners set up similar plans.
2. Purchased Equipment
The purchase of new equipment can typically be fully deducted the year it is put into service. Normally, purchased fixed assets are depreciated over five to seven years, but IRS code section 179 will allow the cost of qualifying property to be fully depreciated in the year of purchase.
Keep in mind that there are limits as to how much can be bought in one year, but with strategic planning you can maximize your reduction in the taxable income. Purchases can be made on the last day of the year, and still be fully depreciated if it is put into service before the year ends. Understanding your profitability throughout the year will assist you in making good investments and avoiding income tax.
3. Use HSA for Medical Expenses
Medical costs are pretty high, and they seem to just continue to rise. Paying for these costs with as many pre-tax dollars as you can is the ideal situation. As a self-employed person, you have the ability to deduct the cost of your insurance premiums. Most people however, spend a large quantity of money out of pocket, which is not tax deductible.
Opening a health savings account (HSA) insurance plan will allow you to contribute to a savings account for out-of-pocket medical expenses. You will receive a tax deduction when contributions are made to the account. You don’t even have to spend the money contributed to receive the deduction either.
The greatest part of this is that when you do spend the money, it is not taxable income. As long as it is spent on medical expenses you will never pay taxes on the amount invested or the growth. You can also provide your employees with IRS code section 125, which allows them to pay for their medical expenses with pre-tax dollars. You will save the FICA match on the amount that they set aside into the plan. The type of entity the business is in will determine if an owner will be allowed to participate in the 125 plan.
These strategies are easy ways for your company to save on taxes. They are also easy to implement and see immediate savings from. Your small business accounting firm will be able to assist you in finding even more ways to save on your taxes.
Remember, saving starts with knowing and recording all your expenses so you know where your company stands financially. If you haven’t already applied these strategies, you should get started, because there is always money to be saved.
Bert Doerhoff, CPA is the owner and founder of Accubiz, a firm providing accounting services out of Jefferson City, Missouri. Accubiz specializes in small business accounting, bookkeeping services, and wealth management.