Running a small business comes with a unique set of challenges, and navigating the complex world of financial planning is undoubtedly one of them.
As an entrepreneur, you strive to run a lean yet thriving operation. So naturally you want to minimize the income taxes flowing out each quarter and year-end.
With a smart tax strategy, SMB owners can maximize deductions and keep more of their hard-earned money. In this guide, we’ll explore some essential tips to help you learn more about the art of tax planning to boost your bottom line.
A Pro-Active Mindset
One of the key elements to success when starting a business is thinking about the big picture.
Identifying opportunities, overcoming and learning from setbacks, and cultivating creativity and flexibility are all part of the entrepreneurial state of mind. Do your research and have a sustainable business model in place.
Partnering with a skilled financial advisor is a wise investment in any stage of your business development. They can help you manage risk, ensure compliance with state and federal laws around healthcare and retirement funding for your employees, and encourage you to reduce your tax liability as much as you can.
Many experts recommend hiring your family members to pay a lower marginal tax rate. Sole proprietorships don’t need to pay Social Security or Medicare taxes on the wages of a child, and if you hire your spouse, the IRS allows you to opt out of paying the Federal Unemployment Tax.
Section 179 of the tax code allows businesses to deduct the full purchase price of qualifying equipment and software in the year it is purchased. This can provide a substantial boost to your cash flow by accelerating depreciation deductions.
Get & Stay Organized
Having your receipts, statements, and documentation in order will help your financial advisor be as efficient as possible.
Implementing robust bookkeeping practices right from the beginning not only streamlines the tax filing process but also ensures that you don’t miss out on any potential deductions. Easy-to-use cloud-based accounting systems can be particularly beneficial for small businesses, offering accessibility, transparency, and real-time updates.
While most people don’t enjoy learning about tax rules and regulations, it’s crucial to have a general idea of the deductions you’re eligible for as a small business owner as you plan for the future. Here are some of the most common tax breaks for entrepreneurs:
- Salaries, wages, and bonuses paid to W-2 employees are fully deductible, along with health insurance premiums.
- Rent or lease payments for business properties, along with utilities, maintenance, and repair costs for your physical business locations.
- If you work from home, the IRS allows a deduction of $5 per square foot of space that is used as a home office, up to 300 square feet.
- Operational expenses like computer equipment, phones, internet service, copy paper, pens, and other administrative supplies.
- Inventory costs including raw materials purchased for manufacturing products or goods purchased for resale.
- Marketing, advertising, and public relations expenses like business cards, websites, printed collateral, trade show fees, and paid advertising.
- Professional fees paid for legal, tax preparation, and consulting services.
- Travel, mileage, lodging, and meal costs associated with business activities and meetings.
- Start-up costs like licensing fees, permits, and incorporation expenses.
Keeping a close eye on your income and expenses will help you adapt your business strategy to changing conditions and retain more of your profits.
Adding to your retirement savings has many benefits, but one of the most vital for small business owners is the tax benefits involved.
A savvy financial advisor will guide you through the complexities of selecting the right kind of retirement plan for your specific needs. With a traditional 401(k), your contributions reduce that year’s income, which lowers your tax burden. While a Roth solo 401(k) offers no initial tax break, you’ll enjoy tax-free growth and qualified withdrawals in retirement. This is a better option if you expect to be in a higher tax bracket in the future.
If your SMB is on a growth trajectory and you plan to add more employees, you should consider offering a Simplified Employee Pension (SEP) IRA or 401(k) that’s specifically designed for small but mighty businesses.
Your company could also be eligible for various credits, such as a Work Opportunity Tax Credit, the Retirement Plans Startup Costs Tax Credit, an Empowerment Zone Employment Credit, or a New Markets Credit.
Plan for Success
In the ever-evolving landscape of small business ownership, strategic tax planning is a cornerstone of surviving and thriving — and it pays to partner with an expert.
Working with a knowledgeable financial advisor will give your business a competitive edge as well as provide stability through market fluctuations and life-changing events. Whether you’re a young entrepreneur with your first start-up or a seasoned pro with several successful businesses under your belt, I can help you maximize your earning potential and ensure your future is bright.