With the onset of the COVID-19 pandemic, numerous small businesses had to close their doors. However, some were able to pivot quickly and managed to stay afloat during these testing times. It doesn’t matter which boat you’re in; one thing is for sure- working your taxes is crucial if you want your small business to thrive. Compliance ensures you stay out of trouble with the IRS. But it also helps you identify tax deductibles that can help you save quite a bit of money and maintain a healthier bottom line. If you want to know how we’ve listed a few ways below.
Don’t forget transportation costs
If there’s one small business tax deduction trick that entrepreneurs often overlook, it’s transportation costs. While commuting from home to your workplace may not be, but commuting between two workplaces counts. So, until you’ve estimated both mileage calculation and straight expense deduction, don’t pick the latter over the former.
Plus, there’s a chance that some companies have canceled car rentals and flights purchased last year that were refunded in 2020, so don’t forget to add those back in. Factor non-refundable losses as well if they were present. Plus, ensure that company cars and related expenses count as deductions. Being on the tip of these details will make it considerably easy when filing for returns.
Prepare accurate documentation
The safest way to ensure that all your financial statements are accurate and ready for review is by streamlining and accounting processes and hiring an expert to supervise the whole process. In addition, it will ensure that compliance when tax season arrives. Plus, an accountant will help organize your ledger, track routine expenses, and assist in financial decision-making.
If the accountant holds a bachelor’s degree, sponsor an online master of accounting degree to supplement them with additional know-how. Not only will this increase the individual’s accounting and financial knowledge, but they’ll be better prepared when the IRS comes knocking on your door. Of course, the digital route for upskilling has better ROI for your company instead of funding on-campus education. It’s faster, convenient, and saves money.
Read section 179
Those equipment expense depreciation charts may look overwhelming, but you should review them. Section 179 of the IRC enables business owners to take immediate deductions on expenses related to depreciation. With the lump-sum method, taking the total value of cost is possible.
However, you can only account for purchases in the year they were incurred, and the total shouldn’t surpass $500,000. For most businesses, this doesn’t just get you the most benefit at once, but it also covers an array of purchases as well. To ensure it works for you, compare the calculated phase-out method with this tactic. Plus, claiming your lump-sum benefit requires you to file form 4562, so don’t forget that.
Hire family members
What do you own? A partnership with a family member or a sole proprietorship? If your children are old enough to participate in your business, consider hiring them instead of external employees. You can save a lot with this business tax deductive tip while ensuring money stays within the family.
Employ your kids legitimately, which includes preparing them for any state taxes and W-2s. Once you’ve hired them, you’ll be able to pay them standard wages without giving up money for FUTA and FICA. However, state and federal income taxes still apply.
Leverage qualified business income deductions
With the introduction of the Tax Cuts and Jobs Act, the IRS now allows certain business entities to deduct up to 20% for qualified REITs (real estate investment trusts) and 20% of qualified business income. When taking into account standard deduction or itemized deductions, this may provide significant savings. The majority of S-corps, partnerships, and sole proprietors – along with certain trusts and estates – are eligible for this. However, not all business qualifies for these benefits.
Take charitable contributions into account
Financially speaking, 2020 was a disaster for many small businesses. These setbacks, however, have increased the number of charitable activities to support people in these testing times. So, if you intend to donate, it’ll be a win-win situation for you. You’ll be helping people in dire need of essential services, and you’ll also be building your brand reputation and helping your bottom line.
Charitable donations are an intelligent tax deduction strategy. If you don’t take the standard deduction, this strategy will work perfectly for you. For approved nonprofits and charities, you’ll be limited to $300 above-the-line contributions.
See raises vs. benefits
Some consider a valuable employee perk as a way to save on employer payroll taxes. IRS has presented a little guide, explaining what is taxable and what can’t. However, your employees wouldn’t be paying taxes on the following benefits:
- Occasional tickets to music or sporting events
- Some employee meals
- Approximately $50,000 in life insurance coverage
- Company cellphone
Remember that the IRS considers even the smallest of gift cards as taxable income. So if you don’t want to shoulder the extra tax burden, just give a small birthday gift to your employees. For example, even a fruit basket may provide tax savings. Likewise, there’s no tax burden on anything considered a de minimis benefit (too minor or trivial to merit consideration). Talk to a tax professional about how extra benefits like retirement planning or tuition fees can be considered expenses during tax season without incurring additional income tax.
Boost retirement funds
Who wants to slow down while building their nest egg? No one! Salaried workers working in their own companies can benefit from lowering taxes and boosting retirement funds. So create your retirement plan while running your business and save on taxes. Likewise, you can also do the same for your workers- a benefit they’ll greatly appreciate.
Conclusion
If you want to save money during tax season, focus on your deductibles- this article a few tips to help you out. Start by hiring an expert to help you streamline accounting processes and ensure tax compliance. It will also help you identify how much money you can save via deductions.
Don’t overlook the amount of money you can save on transportation expenses. Read up on Section 179 and the Tax Cuts and Jobs Act to identify if your business can benefit from other income and business-related tax deductibles.
Hire family members, donate to charities and build a solid retirement plan. By following these tips, you’ll be able to save yourself a pretty penny when calculating how much you owe in local and federal taxes.
