As a business owner, you shouldn’t be afraid of paying taxes. If you’re paying taxes, you’re making money. Yet, no one wants to pay more taxes more than they have to. Today, we’ll help you make an effort to lower your taxable income with a few easy tips.
1. The Answer Isn’t to Spend More
Of course, you’d like to make as much money as possible, but you do have to keep an eye out on your AGI (Adjusted Gross Income). After all, there are tax brackets you need to be wary of. For example, you can easily avoid the additional 0.9% Medicare tax if your AGI doesn’t exceed $200,000 ($250,000 for joint filers).
A lot of people have come in, questioning whether they should make a huge business expense at the end of the year, so they won’t have to pay more taxes. Our answer is you should do what’s best for your business for the sake of your business, and in the process lower your taxable income.
2. Contribute to Your Retirement
One of the easiest ways to lower your taxable income but still hold on to your money is contributing to your retirement. For small business owners, consider opening up a SEP IRA, a SIMPLE IRA or even a solo 401k.
Open up a SEP IRA if you’re looking to make a tax deductible contribution for yourself and for your employees. A SIMPLE IRA is best for any business with less than 100 employees and you’re looking to contribute to both your and their own retirement. If you’re doing it all alone, you only need a solo 401k.
3. Set Up a Health Savings Account
You never plan to have medical expenses, but that’s what makes an emergency health savings account so important. Make sure that you have an emergency fund dedicated to medical expenses. If your medical plan has a high deductible, you may instead contribute to your HSA. Any unused contributions you make into your plan will roll over indefinitely, collecting interest and end up tax-free.
4. Continue Your Education
Old dogs may not learn new tricks, but you certainly can. As a business owner, the best way to improve your business is to stay educated. Take a few classes at any college or postsecondary institution, and you will be eligible for the Lifetime Learning Credit of up to $2000. This not only will help pay for your college and come into play during tax time, you’ll learn something in the process.
5. Tax-Free Ways to Extract Income Out of Your Business
Most aspects of your business are taxable including salaries, bonuses and any distributions of business shares. However, there are a few ways you can actually take money out of your business and not trigger a tax on them.
Some of those ways include tax-free fringe benefits that are quite important, including a health plan, retirement options and approved loans for your business with little to no interest. In some cases, you will have to report interest on a few loans, but only if it falls below the Applicable Federal Rates.
6. Remodel Your Business Structure
If you’re looking for significant flexibility on your business income taxes, it may be time to switch from a sole proprietorship or partnership to an LLC (Limited Liability Company).
An LLC offers plenty of advantages for any small business. First, you’ll be able to deduct 20% of your business income off your individual tax return. Secondly, you can control how much you pay yourself, then the rest of your LLC’s income will belong to your business and will be tax-free. This will help you save a lot of money come tax time as you won’t give up a significant portion of your income to cover self-employment taxes.
7. What If You Aren’t Running a Business?
In some cases, the IRS may consider your business a hobby. This will happen if your business hasn’t turned a profit in three of the last five years, or your annual net profit is less than $10,000. When the IRS categorizes your business as a hobby, you won’t have to claim a business loss on your tax return. However, you work too hard all year long for your business to be a hobby. There are easier and less strenuous ways to lower your taxable income.
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Take advantage of these 7 simple ways to lower your taxable income this year and years following. In actuality, it’s up to you to utilize these tips and make them work for you and your business. But don’t let these be the only things you do to reduce your taxable income! Get in touch with your tax advisor at Lucia CPA to discover new ways to help minimize your small business taxes. For more information, contact us online or by phone at (800) 614-0139.
