Bloated tax bills can harm your business and cause run-ins with the law. Indeed, your decisions can impact your brand’s tax liability for the rest of the year. While most entrepreneurs admit paying taxes is not exciting, it can’t be ignored. Fortunately, small businesses can exploit the IRS rules to optimize their tax efficiency. Here are four helpful ways to reduce your business’s tax liability.
Determine the deductions you are legally allowed to make
Most business owners grapple with heavy tax bills because they don’t know which taxes they are legally permitted to make. Not knowing your allowable deductions means you are losing tons of money that could be saved annually. Some common expenses that allow tax deductions include business cell phone bills, contributions to retirement funds, cost of business operations, company vehicle expenses, and so on.
Hire your family members
Another simple way to reduce your tax liability is to employ your family member in your business. The IRS allows small businesses to pay lower marginal rates or remove taxes on income paid to family members. Sole proprietors may not have to pay social security and Medicare taxes on their relatives’ wages, so feel free to consider this. You only need to verify that your revenue comes from a justifiable business purpose. Under FUTA (Federal Unemployment Tax Act), small business owners can hire spouses to limit their tax bills. And based on other benefits your family members enjoy from their jobs, you can further allocate retirement savings for them.
Contribute to a charity
Businesses can deduct up to 25% of their taxable income from charity contributions. Remember that this smart move lowers your tax liability and fosters trust and brand reputation. You will want to choose a well-recognized charity that allows you to track your donations. You can also leverage section 501(c)(3) of the IRS code to seek tax exemption if you run a charity or nonprofit organization. According to Code Section 170, they are eligible for tax-deductible donations. It’s, however, advisable for charity organizations to avoid participating in political campaigns or affiliations to ensure they abide by the requirements of the Internal Revenue Code under this section.
Pay for your own health insurance coverage
The Internal Revenue Service offers opportunities for self-employed individuals to financially cater for their insurance. That means you can reduce your taxes if you work for yourself and pay your own insurance cover. Those who get insurance protection from their employers usually share the premium costs. Freelancers and self-employed persons can also benefit from self-employed insurance deductions, so keep this in mind. Once you are eligible to claim this deduction, you can save some money on taxes. Adjustment claims typically apply to only your net profit from your trade or the company you secure your insurance plan.
If you don’t strategize your tax obligations, your business revenue could drain due to high tax rates. Fortunately, you can avoid these by adopting the strategies mentioned above.