When tax time crotches in, you can always hear the collective groan of business people as they sort the amount they should pay to the government. There are huge chances that even if you operate an online business, you feel the pinch of paying taxes. However, there are some hacks to reduce the amount of taxes you remit to the government legally.
Ease your woes by applying some of these tricks. Why would you pay more taxes, whereas you can reduce the amount you give to the government?
Reimburse with Accountable
If a company reimburses its employees for entertainment, tools, travel, or other costs, they could consider doing so with a strategy that agrees with the IRS requirement. It is referred to as an accountable plan.
With this kind of strategy, the business will deduct the amount from the expenses but fail to report an income to employees as reimbursement. That will save the firm employment taxes as well as reducing the overall taxable income.
Again, if you fail to offer the employees an accountable plan, they will surely ask for one soon enough. Presenting the employees with a responsible plan for reimbursements will help save money on taxes and improve the business.
Check on Adjusted Gross Income
Most of the tax breaks, additional taxes, and limitations will arise from modified adjusted gross income or adjusted gross income. A good example is that you’ll do away with the 0.9% additional Medicare tax on your earned income if your adjusted gross income is less than $250,000 (married) or $200,000 (single).
Don’t Overlook Carryovers
Some credits and deductions will have limitations preventing you from using the credits during the current financial year, but you are allowed to carryover to future years to reduce the taxable income. Indicate the carryovers so as not to forget to utilize them when their time comes.
Some tax preparation programs will do this for you; the process should be conducted by a tax professional. Examples include:
- Charitable contribution deductions
- Capital losses
- Home office deduction
- General business credits
- Net operating losses
Employ Family Members
This hack works best for small businesses. IRS allows several options, all of which shelter the firm’s income from taxes. You are allowed to hire even your children to the business. According to the founder of Sound Accounting, Scott Goble, by recruiting family members, small ventures will pay a lower marginal rate or even do away with the family’s income tax.
Also, sole proprietorships do not ask for Medicare taxes and social security on the salary of a child. You should note that the earnings should come from legit business purposes. Small businesses are permitted to hire their spouses to reduce the tax as the spouse will not be taxed.
Employ Smart Tax Elections
Creating a smart strategic plan on your business expenditure could help you reduce the taxable income. A good example is taking advantage of the deduction of acquired machinery cost up to a certain amount.
In case you have a new business, and you have not made any profits yet, you could ask the accountant to check into the depreciation of this machinery and equipment. It would be lucrative to spread the value of the equipment to the future tax years rather than deduct the entire purchase price.
That will help with the future deductions when the assets will be of more value to you. Here are some few examples you can consider to bring down the tax to remit:
- Deducting home office expenditure based on actual costs.
- Deducting vehicle expenses based on the cost at which they were acquired.
- You could claim disaster losses on the prior-year returns and not the return in the year the disaster happened.
Choose a low tax jurisdiction
Another evident way to pay less taxes is to incorporate a company in a low tax jurisdiction. For instance, company registration in Cyprus is a popular and legal means to pay a lower income tax in comparison to other countries.
Apply Tax-Free Ways
Distributions of profits share, bonuses, and salaries are all taxable. However, there is a way you can benefit from the company without having to pay tax. You could discuss with your accountant about:
- Loans to you by the business on a low or no interest basis. In case the loan interest falls below the IRS set interest rates, the business should report the interest.
- Tax-free benefits, such as retirement plans, medical coverage, and health savings accounts.
Fringe Employee Benefits Plans
Additional wages hike the employment tax costs for the firm. However, that can change if the company pays some fringe benefits for employees. Some of the tax-exempt benefits you can give to your employees include:
- Long-term care insurance
- Disability insurance
- Group term life insurance
- Educational assistance
- Employer-sponsored health insurance
- Transportation benefits
- Dependent care assistance
- Meals for the employees
Make End-Year Assessments
Even though tax planning should be a year-round initiative, you can save a lot by taking measures as the year bows. Here are some strategies you can employ to help you bring down the tax your business should remit:
- Buy fixed assets and claim depreciation immediately – you can bring down the taxable income by claiming some depreciation on bought fixed assets. It would help if you also considered revaluing the assets in your company books. It will enable you to lower net profit and boost the claimed depreciation.
- Do not bill for unpaid work until it is paid – in case you practice cash basis accounting, you could delay billing the outstanding work at the end of the year until it is paid the following year. That will categorically lower the tax liability for the current financial year. Ensure you do not defer the income if you are a little bit worried about the client’s ability to pay the debt.
- Submit taxes in good time – when making your end-year plans, it is always vital to file and submit it on time. There are penalties for filing late and also submitting the tax late. Ensure you file in good time to avoid these unnecessary penalties.
- Do away with bad debts – supposing you have a customer that is not able to pay; then, you can write it off. According to the taxman, that will be considered a loss and will lower your taxes and profits. For this deduction to hold you must have indicated the bad debt in your income reports.
Follow these remarkable hacks to bring down the amount of tax your company should pay. That should leave you with more profits to enable you to expand the business or even purchase new assets. However, as you look to reduce the tax amount, you should be careful to do it lawfully. You do not want to be sued for tax evasion.