You can actually live or die as a small business owner if you don’t pay your taxes. Taxes on money collected during the year can chip away at your profit margins by as much as 25% or more. Filing taxes correctly may put more money in your pocket and help your company appear more lucrative on paper.
Every receipt should be saved
Don’t be a slacker when it comes to keeping track of your expenses. When you fail to register a company cost in your accounting software, you’re simply throwing money away. Deductions, sometimes known as tax shields, do not provide the same dollar-for-dollar decrease in tax liability as credits. Rather, they reduce taxable income. Your company’s taxable income, which is the difference between revenue and deductions, is used to calculate business taxes. Deductions are an important technique to lower your taxable income and, as a result, your tax burden. Save the receipt, conduct some research, and consult a tax specialist if you’re unclear if a cost qualifies as a business deduction.
Clients must be billed in January
Defer receiving payments for a few weeks until the next tax year begins at the end of the year. Particularly substantial payments from your most important clients. If you wait until the first week of January to file your taxes, the money will not be credited toward this year’s taxes and will have to be claimed the following year. If you just get a few large payments from one or two clients each quarter or bi-annually, this can be quite beneficial. Make your plans with your taxes in mind.
Request a deduction for qualifying business income (QBI)
The qualifying business income (QBI) deduction reduces taxable income by 20% for eligible businesses. Because you don’t have to do anything unusual to qualify, it’s the ideal self-employed tax deduction. All you need is a pass-through company. By lowering a company owner’s taxable income, the QBI encourages entrepreneurship. The Blueprint guide to the qualifying business income deduction may be found here.
Losses that are carried over
For the first several years, small enterprises frequently lose money. When your firm starts to make a profit, you may take advantage of the net operating loss (NOL) deduction to reduce your tax burden. Due to the COVID-19 epidemic, the NOL deduction rules were eased. You may be able to carry back a loss in 2020, which would result in an instant tax refund for a portion of taxes paid in the previous five years.
Make a plan for your retirement
You can earn a tax benefit for contributing to or sponsoring a retirement plan, such as a 401(k) or an IRA, whether you’re a sole proprietor or have workers. Business owners can join the same typical 401(k) plan that their workers do. Because they reduce the number of employee salaries due to the Federal Unemployment Tax Act, employee retirement plans can save your company money on payroll taxes (FUTA).
Take a deduction for your home office
If you work from home like me, you may be eligible for a unique deduction if you dedicate a piece of your house to your business. The home office deduction can be calculated in two ways. The simplest method is to increase the square footage of your home office by $5, which should not exceed 300 square feet. Alternatively, multiply qualified home costs by the amount of your house utilised for business to get the home office deduction.
Purchases of a Business
To claim office equipment and other supplies as a tax write-off, wait until the end of the year to purchase them. At this time, you should buy new reams of paper, office equipment, pencils, pads, and anything else your company need. It’s also a good time to look for discounts on office chairs, desks, and other equipment.
Old company equipment can be donated
Here’s a great tax tip for the end of the year: Look around your office and give everything you don’t need. Since you went paperless, you haven’t utilised that printer in the corner. That perfectly great desk chair that no longer elevates your vibrations? They can be deducted from your taxes. When you give your old office furniture and equipment to a 501(c)(3) organisation, you may deduct the fair market value. To assess your contribution, use our guide to fair value accounting. If your old equipment is too damaged to give, you can write it off as a Section 1231 loss. Consult a tax specialist about incurring a loss on equipment that has been abandoned.
Fix assets should be depreciated
Fixed assets are depreciated during their useful life rather than being expensed when bought, as you taught in Bookkeeping 101. Follow the IRS’s own depreciation approach, the modified accelerated recovery cost scheme, to roughly match your financial reporting (MACRS). With a Section 179 deduction or bonus depreciation, the IRS enables you to deduct the whole cost of a fixed asset in the year it is placed in operation. Keep in mind that not all assets qualify for Section 179 or bonus depreciation treatment, and there are limitations to all tax regulations.
Take tax planning at the end of the year seriously
Take some time to think about year-end tax strategy before you shut the books. You could learn some useful tax advice, such as deferring sending bills to clients until the next year. Because cash-basis taxpayers only pay tax on cash received, you’re delaying taxable income until the next year by deferring collections.
Make use of a decent tax software programme
Tax software is made to help you save money. When it comes to small company tax guidance and calculating deductions, you should never file your business tax return without the support of a competent tax practitioner or software.
Returns that have been written off
Never claim your returns as income and write them off. Any item that you return and obtain a refund for counts as a loss against your revenue. Returns and refunds should be tracked in your accounting software, and refunds and exchanges should be reviewed every six months. The invoices for these reimbursements may be lost or missing if you wait until the end of the year.
Invest in energy-saving technologies
Look for energy-efficiency credits since they can help you save a lot of money on taxes. The government encourages energy conservation by providing tax credits to businesses that purchase green appliances. Computers, printers, and water heaters (if the business is conducted from home) are also eligible. Solar electricity is now the most cost-effective green alternative. Look for new opportunities and take advantage of them wherever possible.