It’s been said that small business owners are the only people who will work 80 hours a week so no one can make them work 40.
No doubt, running your own business is demanding, but it offers all sorts of rewards both intangible and financial. Among the latter is the ability to take certain steps to reduce your taxes.
If you are an entrepreneur, here are seven ways you might be able to reduce your tax bill. Talk to your accountant to see what might work in your particular situation.
Consider billing that big end of year project in January. This will reduce the company’s prior year taxable income. Of course, if you have good reason to expect that next year will see a significant jump in sales, this might not make sense. Also, make sure you aren’t upending the customer’s own tax strategy by holding an invoice until the new year.
If you are organized as an LLC, look into converting to an S Corp before December 31. This might improve your self-employment tax situation, as S Corp owners can be paid a reasonable salary that is subject to FICA taxes. Your share of any corporate earnings beyond your salary is treated as unearned income and not subject to payroll taxes.
Start a retirement plan
If your business doesn’t have a tax-deferred retirement plan in place, consider starting one. Your contribution will be tax-deferred and any matching funds your business provides to participants will give you a tax savings.
Review your inventory
If there has been a drop in the market value of your inventory, you might be entitled to additional tax breaks. Definitely talk to your accountant about this one, as your accounting method will be a factor.
Spend before year end!
The end of the year is the time to buy that new laptop, replace the faded sign out front, purchase some books for continuing education, and stock up on legal pads. Everything you spend on business needs in these waning days of the year will reduce the company’s taxable income.
Need a new company vehicle? Vehicles weighing more than 6,000 pounds could net you a large depreciation deduction, depending on how much you use it for the business.
Charitable donations of either money or goods/services can be deducted from your business’ income. Be sure to get receipts for what you give. Supporting local non-profits is not only smart tax wise; it helps establish your company as a caring member of the community.
Hire your kid(s)
Paying your children for legitimate work done for the business can save a tidy sum on taxes. If you operate as a sole-proprietorship or sole operator LLC and your kid is under 18, you are not required to withhold payroll or FICA taxes on money paid to the youngster. What’s more, your son or daughter can use their standard $6,300 deduction to offset the wage you pay them. Let’s also not forget it’s a great teaching opportunity.
Related note: Adding your spouse to the payroll probably doesn’t make sense unless he or she wants to participate in your company’s retirement plan. Otherwise, it’s a wash. You are creating a deduction for the business, but adding earned income to your joint personal return.
Implementing some or all of these strategies could give you a great holiday present – a lower tax bill. But again, don’t go playing Santa without help from your accountant. You don’t want the IRS leaving a lump of coal in your business stocking in the form or an audit or penalty.