Tax-saving strategies for small businesses

The end of tax year is quickly approaching, and it’s time for tax returns. Every shilling counts when you are running a small business. Minimizing taxes may be the difference between profitable and loss-making business.

Hundreds of business owners will turn to their advisers for tips and strategies on how to save money and they’ll all get the same time-worn response: Sell underperforming stocks to harvest losses or make sure you have spent the money in your flexible spending account. Don’t fall into that trap.

As a business owner you have at your disposal several tax-saving strategies to consider before the year ends. You still have time to significantly reduce your 2020 business tax bill. It's important to speak with an accounting professional to make sure you understand specific tax issues and changes that are relevant to your business. These tips can set you up for success this year.

ESTABLISH A TAX-FAVOURED RETIREMENT PLAN.

If your business doesn’t already have a retirement plan, now might be the time to take the plunge. Most entrepreneurs I meet seem to be constantly teetering on the brink of personal insolvency due to an isolated focus on their business. The most successful business owners are able to be more competitive because they feel financially fit themselves and thus more confident about the moves they make. An easy first step is to establish a retirement plan that offers you financial security regardless of the long-term success of your business. These plans come in many shapes and sizes, and a trusted financial professional can help you decide which is best for you.

STAY ON TOP OF ADJUSTED GROSS INCOME.

Your adjusted gross income can directly impact the deductions and credits your business is eligible for. While the particulars of how to calculate this figure vary depending on specific tax laws, being aware of it is vital in planning for tax season. Check with your accountant or third-party tax partner for specific guidance.

FOLLOW YOUR SPENDING TO TRACK DEDUCTIONS.

Keeping track of your spending is easier than ever these days but it can still seem daunting to some. Maximizing your deductions requires awareness of how you spent your money throughout the year which is also helpful for understanding cash flow.

Properly organizing and tracking receipts makes it easier to not only log deductions accurately, but in the event your business is audited, providing those receipts and proof of your expenses validates that costs were reported properly.

AVOID PENALTIES FOR LATE PAYMENTS.

This may be a simple concept, but it's still a key issue and one of the most important business tax-savings tips. Late payments can be avoided in a variety of ways. Getting your documentation together early in the year can prevent last-minute filing and unforeseen expenses

CONSIDER RESTRUCTURING.

When formally launching a business, you must decide what form of business entity to establish. And the type of entity you choose has its own taxation policies and deductions. It's a good idea to revisit your business structure every few years to see if reclassifying it makes sense based on your goals and financial bottom line.

TAX SOFTWARE IS YOUR FRIEND.

Let’s be real. Tax planning software is a must for small business owners. Using tax software will make preparing and filing your taxes online much easier. Most tax preparation and filing software automatically accounts for tax laws and rules. This can simplify filing for you; reducing the likelihood of errors and making it easier for you to take full advantage of the opportunities at your disposal. What's more, for some business owners, it can be one of the simplest and most cost-efficient ways of filing tax returns.

PUT YOUR FAMILY MEMBERS TO WORK.

Surprisingly, this is an often overlooked under utilized strategy. I find employing family members to be one of the most overlooked and yet resourceful ways to begin reducing the household tax burden. By employing your wife as the director of operations for your firm, for example, you will be able to double the amount of income that can be deferred. Even if your spouse isn’t working with you full time, he or she may be more engaged in your business than you think and could have a place there. If you have children, it may make sense to put them on the payroll, as well, as legitimate employees.

Your family business can help you teach your children about the value of a shilling and the importance of hard work. Children typically will be in a lower tax bracket, but that doesn’t mean they aren’t spending plenty of the household money. Rather than taking your personal wages and paying for the children’s expenses, you can pay them their wages directly, so they can cover those expenses themselves at a lower tax rate and potentially no tax if their income doesn’t exceed their standard deduction.

DEDUCT YOUR HOME OFFICE.

Most people who work from home are afraid of taking the home office deduction. If you work from home at least look at if you qualify for this tax deduction, you may be overlooking an extraordinary opportunity.

You may be surprised by how much money you can save. Just be sure you’re executing a contract in which the rent is paid at fair market value and that it is an ordinary and necessary business expense of the entity.

STOP IGNORING YOUR AUTO EXPENSES.

You may not be aware of this, but you can deduct your auto expenses when used for business. I just had a client leave his employer so he could start his own business. For the first two months after he went out on his own, he tracked his mileage and guess how much of it was for his business? The number was a little more than 90 percent. If this pace continues for the whole year, he will be able to deduct thousands of shillings because he uses his car for business.

As you can see, there are plenty of options for the SMEs, and unique ones at that. Make sure you consult with your Tax advisor. A small business owner’s tax return offers a lot of potential to keep the tax man at bay.

SUMMARY

• The end of tax year is quickly approaching, and it’s time for tax returns.
• Every shilling counts when you are running a small business.
• Minimizing taxes may be the difference between profitable and loss-making business.
• Hundreds of business owners will turn to their advisers for tips and strategies on how to save money and they’ll all get the same time-worn response.

Adopted from Business Daily.