If you’re a business owner, here are strategies you can leverage to legally reduce the taxes you owe when it’s tax filing season.
Spend Strategically
Taxes are assessed by whether you save or spend your money. When you spend and invest your money in certain ways, you can lower your taxes.
As a business owner, seek opportunities to spend your money in ways that could give you tax deductions. Investing back into your business—such as spending money on new software or systems that can increase efficiency or on fresh advertising and marketing strategies—could reduce your tax bill. You can write them off as business expenses while using them to improve your business. If you’re considering expanding your business, you could look into the Work Opportunity Tax Credit for hiring employees from certain backgrounds.
Additionally, consider pre-paying for services or materials you’ll need the next year. That way, you can get that money off of your balance sheet for the current year as an expense, decreasing your taxable income. Plus, in many cases, you’ll be able to start leveraging a service or material sooner. For instance, if you plan on ordering 1,000 new business cards in the first quarter of the new year but instead order them in the last quarter of the current year, you could write off those business cards as an expense for the current year’s taxes and start handing them out sooner to prospective clients.
Evaluate Your Business Structure
Many business owners, I've found, start their ventures as a limited liability company (LLC). However, an LLC is not a tax-efficient entity; it’s considered a pass-through entity. That means that instead of a tax being assessed to the business, it’s assessed to the owners of that business in direct proportion to the revenue they have for their ownership percentage.
Make Financial And Tax Planning A Habit
I’ve observed that too often, business owners treat financial and tax planning as an annual activity. They call their financial advisor, tax advisor and/or accountant when tax season rolls around and maybe have another call with them at the end of the year. If they’re thinking about selling their business, they might book more meetings to work through the potential tax consequences. Overall, they don’t treat financial and tax planning as a habit. Instead, they treat it as an event.
But if you treat financial and tax planning as an event rather than a habit, then you’re likely going to miss opportunities to lower your taxes. For instance, your accountant might inform you of an area you could spend on to reduce your taxes, but if you’re meeting with them after the start of the new year, it’s too late for that spending to apply to the current year’s taxes. Even if you meet with a licensed professional before the end of the year, you might not be able to act on their advice without depleting your cash reserves. By sitting down with the right experts regularly and not just right before or during tax season, you can legally and strategically lower your taxes in a way that will make a big long-term difference to your business.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
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