Businesses need to keep their ducks in a row during tax season and beyond. From state and federal income taxes to self-employment, there are many ways to reduce tax burdens for small business owners.
For example, business structures influence which forms to file, when, and how much taxes are owed. Plus, it’s important to mark your calendar and set alarms so you don’t miss filing deadlines and incur extra penalties.
Tax Brackets
Using their extensive knowledge of tax codes, accountants can help individuals and businesses minimize their tax liability. This is accomplished by maximizing both credit and deductions. Tax credits offer dollar-for-dollar reductions in taxable income, while tax deductions reduce total taxable income. For example, a business may choose to make large charitable contributions in one year and save for retirement in another to maximize its itemized deductions.
A company’s accounting firm can also advise on how to best manage financial assets to minimize taxes. For instance, a tax accountant can help determine the most advantageous form of business for an individual or company, recommend investment strategies, and review and prepare various forms, schedules, statements, and invoices to file taxes.
No business or individual can expect to thrive without a well-thought-out plan that includes strategies for minimizing tax bills. And with tax season approaching, it’s important to start planning now. Try Patriot’s online accounting for an easier way to track expenses, money, and invoices, and get your ducks in a row before tax time.
Depreciation
One of the most important factors when filing taxes is your adjusted gross income (AGI). This figure represents your taxable income, and you can reduce it by saving for retirement or 401(k) accounts, reducing your investment income through deductions, or making charitable donations.
Depreciation allows you to write off certain assets over time, and it is based on an asset’s estimated useful life. The IRS has rules on how assets are depreciated, and a tax accountant can help you maximize your deductions by using Section 179 and bonus depreciation deductions and by conducting a cost segregation study.
Business owners can also reduce their taxes by timing the recognition of income and expenses. This may mean accelerating income or deferring expenses, and it can be complicated as many tax law changes occur year-round and can impact the optimum strategy. Tax planners will also help you understand how real estate sales and other property transactions can impact your taxes.
Investments
The tax code can be complex, and the rules are always changing. Individuals and businesses must keep up with the latest changes and find ways to minimize their taxes. This can be done by setting reminders, separating personal and business expenses, and creating tax-efficient investments.
Property investment tax advantages have long been a popular strategy for small businesses and individuals. This is especially true for real estate, where the tax benefits can be substantial.
However, not every property investment is the same, and determining whether a particular property meets the criteria for being considered a tax-planning strategy can be challenging. Generally, a strategy may not be a tax-planning strategy if it involves accelerating or deferring income. This is because, if the result is merely a replacement of existing NOLs and credit carryforwards, it will not satisfy the definition of a tax-planning strategy under ASC 740-10-30-19. In addition, a full valuation allowance must be recorded in such cases.
Capital Gains
Whether you’re selling appreciated assets to charity or leaving them to your beneficiaries in your estate, reducing capital gains taxes is an important part of your overall tax strategy. Incorporating tax efficiency strategies into your investing and wealth transfer plans can make a big difference in the long term.
One way to do this is by holding investments longer, as long-term capital gains are taxed at a lower rate than short-term gains. We also recommend minimizing your exposure to taxes by diversifying with municipal and treasury bonds, which generate income exempt from federal and state taxation.
Another technique is tax loss harvesting, which involves selling underperforming investments for a loss to offset taxable gains. However, you should always be careful to avoid trigger wash sale rules, which prevent you from repurchasing the same investment within 30 days of your initial sale. A trusted financial advisor can help you implement this strategy efficiently.
