How Businesses Can Pay Less Tax this Tax Season?

Tax season is here again, and for many businesses, this can be a stressful time. However, it doesn’t have to be. With the right knowledge and preparation, businesses can take advantage of tax deductions and credits to reduce their tax liability and keep more money in their pockets. 

Here, we’ll explore various ways businesses can pay less tax this filing season. From understanding your business structure to taking advantage of tax deductions and hiring a professional, we will provide actionable tips to make tax season less daunting. We followed these tips and saved a hefty amount on our taxes. We believe you can do the same.

So, whether you are a small business owner or a large corporation, read on to learn how to keep more of your hard-earned money this tax season.

Understand Your Business Structure

Before you can start reducing your tax liability, it’s important to understand how your business structure affects your tax obligations. The four main types of business structures are sole proprietorships, partnerships, LLCs, and corporations. Each type of structure has its own tax implications, advantages, and disadvantages. Here are the most common business structures:

Sole proprietorship

It is the simplest type of business structure and is owned by a single individual. The profits and losses of the business are reported on the owner’s personal tax return, and the owner is responsible for paying self-employment taxes on the business’s net income. Sole proprietors may be able to deduct expenses such as home office expenses, mileage, and health insurance premiums.

Partnership

This is a business structure in which two or more individuals share ownership of a business. Like sole proprietorships, partnerships are not taxed separately from their owners. Instead, the profits and losses are reported on the partners’ personal tax returns. Partners may be able to deduct expenses such as business-related travel, meals, and entertainment.

Limited Liability Company (LLC)

This is a hybrid business structure that combines the flexibility of a partnership with the limited liability protection of a corporation. LLCs are not taxed as a separate entity, but rather the profits and losses are reported on the owners’ personal tax returns. LLC owners may be able to deduct expenses such as equipment purchases, professional services, and advertising costs.

Corporation

Corporations are separate legal entities that are taxed separately from their owners. C corporations pay corporate income tax on their profits, and the owners pay personal income tax on any dividends they receive. On the other hand, S corporations are not taxed as separate entities; the profits and losses are reported on the owners’ personal tax returns. Corporations may be able to deduct expenses such as salaries and wages, rent, and insurance premiums.

Understanding your business structure is essential for identifying the tax deductions and credits available to you. By taking advantage of the specific tax benefits that apply to your business structure, you can lower your tax liability and keep more money in your pocket.

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Take Advantage of Tax Deductions

One of the best ways to reduce your tax liability during the tax season is to take advantage of tax deductions. A tax deduction is a reduction in taxable income, which can ultimately lower your tax amount. Here are some common tax deductions that businesses can take advantage of:

Equipment and supplies

Businesses can deduct the cost of equipment and supplies that are necessary for their business operations. This can include anything from computers and printers to office furniture and tools. The equipment and supplies must be used for business purposes only to qualify for this deduction.

Example: A small business owner purchases a new computer for $1,500 to be used solely for business purposes. They can deduct the full $1,500 from their taxable income.

Office space

If a business operates out of commercial space, it can deduct the cost of rent, utilities, and maintenance expenses. Suppose the business operates out of a home office. In that case, it can still deduct a portion of its home expenses, such as mortgage interest, property taxes, and utilities, based on the percentage of the home used for business.

Example: A business owner operates a small retail store and pays $2,000 monthly rent. They can deduct the full $24,000 ($2,000 x 12 months) from their taxable income.

Business travel

Businesses can deduct expenses related to business travel, such as airfare, lodging, and meals. To qualify for this deduction, travel must be necessary for business purposes, not personal.

Example: A business owner travels to a conference for their industry and incurs $1,500 in airfare, lodging, and meals. They can deduct the full $1,500 from their taxable income.

Advertising and promotion

Expenses related to advertising and promoting a business can be deducted, such as the cost of creating and distributing flyers or running ads on social media or search engines.

Example: A business owner spends $2,000 on a social media advertising campaign to promote their business. They can deduct the full $2,000 from their taxable income.

It’s important to note that there are specific rules and requirements for each tax deduction, so businesses should consult with a tax professional to ensure they are eligible for the deduction and to accurately calculate the amount they can deduct.

Other business expenses

Other deductions, such as employee benefits, depreciation, charitable donations, and home office deductions, can also benefit you by minimizing your tax liability this year.

To qualify for these tax deductions, keeping good records of your expenses throughout the year is essential. This can include receipts, invoices, and bank statements. Taking advantage of tax deductions can significantly reduce your taxable income and help you pay less taxes during tax season. So, be sure to speak with your tax professional and identify all the deductions available.

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Keep Good Records

To take advantage of tax deductions and credits, it’s essential to keep good financial records throughout the year. Proper record-keeping can help you identify expenses that can be deducted, and it can also help you prove your deductions if you are ever audited. 

So, what exactly constitutes “good” record-keeping? Here are some tips:

  • Separate personal and business expenses: Keeping your personal and business expenses separate is essential. Use separate bank accounts and credit cards for your business expenses to make them easier to track.
  • Keep receipts: Keep all receipts for business expenses, including meals, travel, and office supplies. Make sure to keep them organized and labeled so that you can find them easily later.
  • Use accounting software: Using accounting software can help you keep track of your income and expenses, generate financial reports, and make tax preparation easier.
  • Reconcile your accounts regularly: Make sure your records match your bank and credit card statements. This helps you identify any discrepancies or errors early on.
  • Don’t forget about mileage: If you use your personal vehicle for business purposes, track your mileage. You can deduct the cost of using your vehicle for business on your tax return.

Keeping good records can be time-consuming, but it’s worth the effort when tax season rolls around. By having accurate records, you can identify all the deductions and credits you’re eligible for, which can result in significant tax savings. Don’t wait until tax season to start organizing your financial records – make it a priority throughout the year.

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Consider Depreciation

Depreciation is a tax deduction that businesses can use to reduce their tax liability. It is a way of accounting for the gradual wear and tear on assets over time. As assets lose their value over time, businesses can take a deduction on their taxes to reflect this decrease in value.

When a business purchases an asset, such as equipment or property, the asset’s cost is not deducted from the year it was purchased. Instead, the cost is spread out over the asset’s useful life through depreciation.

There are two main methods of depreciation: straight-line depreciation and accelerated depreciation. Straight-line depreciation allows businesses to deduct the same amount each year over the useful life of an asset. On the other hand, accelerated depreciation will enable businesses to deduct a larger portion of the cost of an asset in the early years of its life.

Examples of assets that can be depreciated include buildings, vehicles, machinery, and equipment. By depreciating these assets, businesses can reduce their taxable income and pay fewer taxes.

For example, a business purchased a delivery truck for $40,000. The truck has a useful life of 5 years and a salvage value of $5,000. Using straight-line depreciation, the business can deduct $7,000 annually ($40,000 – $5,000 = $35,000, divided by 5 years). This means the business can deduct $35,000 in depreciation over the 5 years, reducing their taxable income by that amount.

Accelerated depreciation may be a better option for businesses that need to deduct a larger portion of the cost of an asset in the early years of its life. This method allows businesses to take a larger deduction upfront, which can help reduce their tax liability in the short term.

Depreciation can significantly reduce your taxable income and, as a result, lower your tax liability during tax season. So, speak with your tax professional and identify which assets can be depreciated and which depreciation method works best for your business.

It’s important to note that depreciation is a complex accounting method, and it’s best to have a professional handle it for you. A tax professional can help you determine the correct depreciation method, track your assets, and accurately calculate your depreciation expense.

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Hire a Professional

Navigating the tax code can be daunting, especially for small business owners who may not have the time or expertise to fully understand all the intricacies. That’s why hiring a tax professional can be a wise investment for businesses looking to save money on their taxes this tax season.

Benefits of hiring a tax professional

The benefits of hiring a tax professional may include the following:

  • Expertise: Tax professionals have the expertise and knowledge to help you identify tax deductions and credits that you may be eligible for. They stay up-to-date on changes to tax laws and regulations and can provide valuable advice on minimizing your tax liability.
  • Time-saving: Preparing your taxes can be time-consuming and stressful, especially if you’re unfamiliar with tax laws and regulations. Hiring a tax professional can save you time and allow you to focus on running your business.
  • Avoid mistakes: Filing your taxes incorrectly can result in penalties and interest charges. Tax professionals can help you avoid mistakes and ensure your taxes are filed correctly and on time.
  • Audit protection: If you are ever audited by the IRS, a tax professional can represent you and help you navigate the audit process.

Tips for finding the right tax professional

  • Look for credentials: When hiring a tax professional, look for a certified public accountant (CPA) or an enrolled agent (EA). These professionals have the training and experience to navigate the tax code and identify opportunities for tax savings.
  • Check references: Before hiring a tax professional, ask for references and check their credentials. You can also look for reviews online to understand their reputation and track record.
  • Consider their expertise: Some tax professionals work with specific types of businesses or industries. Consider hiring someone with experience working with businesses similar to yours, as they may better understand the unique tax considerations that apply to your business.
  • Discuss fees: Tax professionals typically charge a fee for their services. Before hiring someone, understand their fee structure and what services are included.

Hiring a tax professional can be a valuable investment for businesses looking to save money on their taxes this season. By identifying opportunities for tax savings, saving you time, and helping you avoid costly mistakes, a tax professional can help your business thrive. When searching for the right tax professional, look for credentials, check references, consider their expertise, and discuss fees to ensure you find the best fit for your business.

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About 403 IT Solutions

403 IT Solutions is a Calgary-based IT Support Company. We have been in the business since 2014, offering a range of IT solutions to small and medium businesses. If you’re struggling with any IT issue, such as outdated software/hardware, untrained staff, data loss threats, lack of quick support responses, and so on, we’re here to help. From dedicating an IT Support Specialist to an IT Support Guy on a need basis, you can rely on us.

For more information, contact 403 IT Solutions and schedule a detailed discussion with us.