It’s safe to assume that everyone loves to save money. As a small business owner, the more capital you have, the easier it is to grow your business and generate more revenue. But when tax season creeps around the corner, an unexpectedly large portion of your hard-earned money could wind up in Uncle Sam’s pocket. If you plan ahead, though, and take the right steps, you might see a whole lot of green in your wallet. Here are a few ways to ensure you receive substantial savings come tax time.
Maximize Your Deductions
This is the most common way for small business owners to save on taxes, especially since there are numerous expenses you can deduct from your taxable income. If you are constantly out and about promoting your business, you can deduct overnight travel costs as well as expenses or mileage from your vehicle. Spend a lot on advertising? You can deduct those expenses, too. While some of the deductions may not relate to your business, there are ubiquitous expenses – such as supplies and utilities — that any type of business can take advantage of.
To view all the available deductions, please refer to Schedule C (Form 1040).
Health Insurance Deduction
One of the most overlooked deductions of a single-member LLC or a sole-proprietorship on Form 1040 is the health insurance deduction. If you’re self-employed, you can deduct the cost of health insurance premiums for yourself, your spouse and dependents. However, there are a few requirements you must meet to be eligible for this deduction. For the overall tax year, your business must have been profitable. If you’re claiming a loss for the tax year, then you are ineligible for this deduction. Also, the insurance plan you choose must be established under your business. S corp owners and employees should report the health insurance payments on their W-2 to be eligible for this deduction.
Put Your Kids on the Payroll
This is another overlooked tax strategy that can benefit your small business. If you have children, paying them for bona fide services – cleaning, delivery, etc. – can be a clever way to save on your business’ taxable income.
Your business can reap these tax-saving benefits as long as:
- Your child is under 18 years old.
- Your child is doing legitimate work for your business.
- Your child’s income stays under $6,300 for the year.
- You’re paying your child a reasonable wage under IRS guidelines. Essentially, you must pay your child the same way you would for a non-related employee performing similar duties.
Don’t Shrug Off Bookkeeping
Without accurate, detailed documentation of your financial transactions, you can’t effectively deduct any of the aforementioned expenses.
First off, it’s imperative to keep your personal and business expenses separate. The IRS does not take kindly to business owners who put all their expenses into one bank account. So, make sure to set up an independent business account and be as cautious as possible not to buy personal items on your business credit card or vice versa.
Secondly, don’t procrastinate on documenting your transactions. As soon as you purchase something for your business, log it immediately. If you defer documentation for later, you’ll probably forget what the nature the expense was and record inaccurate information. ClientBooks, our web-based bookkeeping system, is the easiest and most efficient way to manage and organize your financial records. Find out information about our services here.
Get Professional Help
While there’s a personal satisfaction for doing things yourself – e.g. changing a tire or fixing a leaky faucet – certain things such as tax preparation are better left to the professionals. You might think you’re saving some money by doing your taxes by yourself, but you’ll be much more susceptible to making errors, which will most likely lead to an IRS audit. It’s worth the investment to get your taxes filed correctly because a single mistake could cost your business thousands of dollars.