Business is booming, and that's a good thing in most scenarios. However, come April 15th you start to wonder if there is anything you could have done to decrease your tax liability. All business are subject to federal–and sometimes state and municipal taxes–but smart businesses know how to take advantage of credits, and tricks to lower their overall tax liability.
According to ADP.com, there are 3,000 Federal and State tax incentives available, but 50% go unclaimed each year. Here are a few tax tricks?to decrease tax liability for your business.
Seek all possible deductions
Many businesses don't make use of mileage on their vehicle, depreciation on their building or equipment, or deducting outside help such as the fees for your accountant or lawyer. Don't forget these “smaller” deductions when it comes tax time, as everything counts!
Maximize your use of qualified plans
IRA's and 401k's are great for what's known as “tax deference,” meaning the idea is to put money into these sorts of qualified plans while business is good, and then pull the money out of the plans when you're in a lower tax bracket, or you have a down year. This allows you to pay the least amount of tax on this sort of money.
Divide your gains
When selling a business, or company assets, attempt to sell them as an installment deal where at least one of the payments is due after the current tax year. Spreading the payments out over installments could keep your MAGI (modified adjusted gross income) below the threshold to where you'd be imposed net investment income tax on the revenue generated.
Don't forget the costs of starting a business
When you're running your business, all advertising, inventory, payroll, and professional expenses are deductions, but these only help you once you've opened the doors. Before that point, you have mounting expenses (leases, furniture, utilities, etc.) that are often overlooked. The money paid to start your business is known as a capital expense, and these are tax deductible if done correctly. The law allows you to claim up to $5,000 on your first year taxes and any remainder can be deducted in up to $5,000 increments (in equal amounts) over the next 15 years.
If you're using credit cards or loans to open your business the interest payments are often fully deductible. Check with a local tax professional to see if this applies for your business.
Withdraw cash as a capital gain or qualified dividend
The tax rates on long-term capital gains and qualified dividends are significantly lower than that of regular income tax rates. As a business owner, if you pull cash out of the business, do so in a manner that allows it to be taxed as a qualified dividend. This requires your company be a corporation and not a flow-through business such a sole proprietorship. The gain is taxed at a maximum rate of 15 or 20 percent, and depending on your AGI (adjusted gross income) you may avoid the net investment income tax next year.
Saving your business money is as cut and dry as keeping expenses low and maximizing revenue. However, most businesses forget that monetary gains from sales aren't the only way to maximize their revenue. Decreasing tax liability is often as vital, or sometimes more so, than bringing additional customers through the door.