Small Business - Tax Tips


As many people would imagine specially the small business owners, taxes are a big burden for them. But there are many ways that this burden can be lowered to a great extent. Few steps that can save you from many sleepless nights, here is what you can do.

Are there any additional Deductions that you can claim? Try to think what else you can deduct as business expense from overall income. You can look for cost of training your employees, advertising costs, interest on business loans and many more. But be careful about what you are claiming so that you don’t end up being audited. Your accountant can of great help to look for those hidden deductions.

One of the greatest ways to save tax is to defer your income, any payments that your small business can receive in January instead of December reduces your tax bill up to a certain extent. Good thing to know is that the income that is deferred to January, 2007 will not be taxable until April, 2007. So why not defer your income if you can? Yes, only if you can because it depends on the profit and losses of your company and whether your company can afford to do that. And this works only for a business which uses the method of accounting on a cash basis. There may be certain limitations also like sole proprietor, partnership etc.

If you have not started contributing your income to retirement plan start doing it before the end of the year. Setup a retirement plan for your employees before the end of the tax year. Payment made to your retirement plan will reduce the taxable income and would greatly increase the tax deductions. Federal Law allows sole proprietors to invest up to 20% of their annual income into retirement plans such as 401(k). This can significantly lower your taxes. But be knowledgeable about the fact that different plans have different contribution limits and deadlines.

One of the many smart ways of running a small business is to hire your family members. By distributing the income you can increase the amount that can be taxed at lower tax brackets. But again be sure to do it the right way, consult a good accountant and also make sure that you don’t underpay your family members.

Buying those items now that your business may require in near future will also maximize your deductions this year. It might not be a bad idea if you consider stocking up your supplies or equipments or any other office related items now if your company cash flow permits you to do that.

“Per IRS Section 179 of the Internal Revenue Code allows small business to expense acquisitions up to $108,000 in 2006.”

Keep in mind that if you are buying office equipment, you may need to take into account the depreciation factor and also you will have to use the equipment before the year ends.

Hiring independent contractors instead of direct employees also lowers the payroll taxes.

Smart businesses pay their outstanding bills before December 31 to get the deduction in this year. You can also pay pending bonuses to the employees before Dec. 31 to get the deduction in the current year. Pay off your bills like Electricity, phone, rent, insurance and healthcare to lower your tax bill further and to increase the deductions. And this year there is a new provision that allows you to get the refund of Telephone Excise Tax. Any business that has a phone is eligible. IRS has developed a simple formula to calculate the amount of refund.

Few things you should take into consideration to reduce your tax liability constitute checking your payroll regularly even if you’re the lone employee yourself. Make sure that your cutting the right % of the tax amount every payroll. It may be difficult to estimate before hand how much tax to cut but it’s the law and everybody has to abide by that. Also other thing to look for is Medicare and Social Security Tax, if they are not calculated properly you may have to deal with the penalties later. So consult a good accountant to get an advice in that regard. It is always a good idea to consult a tax professional if there are few employees working at your small business enterprise because you are required to hold back the taxes on behalf of your employees and report that to IRS monthly or quarterly. A Tax Professional makes these things very easy for you and does all the filing that is needed for you.