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Effective Strategies for Small Business Owners to File Taxes

August 27, 2019

For small business owners, each tax season brings a new set of challenges. Small businesses often fail to consider probable deductions and credit opportunities that can maximize their growth and file error-free taxes.

As of now, the average small business tax rate is nearly 20%. It may sound rudimentary, but a number of small businesses incorrectly establish federal tax that they are supposed to comply with every year. And that is why it is imperative to understand the distinction between self-employment tax, excise taxes, employers’ taxes, and income tax.

The tax filing strategies can vary depending on the nature of your business structure. Similarly, small businesses have to determine state taxes and changing legal requirements that can affect business operations in the long run. Keeping that in mind, here are some of the most effective tax strategies for small businesses:

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The IRS Is Not Your Enemy

The uncertainty of taxes often brings out the worst tendencies among small business owners. It is your cooperation, honesty, and authenticity with the IRS that halts an audit. Besides, the process of filing taxes becomes less strenuous so long as you are following standard IRS rules and regulations.

Take Advantage of Health Care Tax Credit

The first step is to seek the counsel of a CPA who can ascertain your eligibility. Once the criterion is established, you can make the most out of your health tax credit and start capitalizing on savings. The healthcare tax credit is specifically beneficial for employers that employ fewer than 25 employees with lower than $50,000 a year. Consequently, this allows employers to pay at least a half share of insurance premiums to their employees.

It’s Time to Deduct Health Care Premiums

Whether you have a separate health care plan or you pay premiums right out of your pocket, you may be eligible to claim health care tax premiums directly as a deduction. However, small businesses should take into account that this strategy is not applicable for group plans.

Don’t Leave Out Property Deduction

Property deductions refer to Section 179. If you’ve got $500,000 worth of property, you can avail the deduction for business purposes. The deduction, however, carries the year-round value of your business property.

The property deduction is ideal for small business owners who have recently moved into a new business facility or intend to purchase a new property to improve the business activities.

Possible Credit for Child Care Expenses

You are free to avail a tax credit so long as you provide childcare expenses for your employees. Comparatively, it may turn out to be even better than claiming a tax credit on the return for your own child. You can avail the tax credit of up to 25% on paid expenses in a single year.

Work Opportunity Tax Credit

Work Opportunity Tax Credit (WOTC) allows small business owners to categorically incentivize their employees. It means you can get tax credit through total working hours, hired workers, and paid wages in a tax year.

If your small business, for instance, hires veterans or disabled individuals, this tax deduction can be beneficial during tax filing. Though the amount of paid wages can vary, you can claim the credit of more than 40% on each new employee from a categorized group.

Focus on Miscellaneous Deductions

It’s the small things that matter and accumulate the most at the end of a tax year. Your small business can make deductions from fees incurred on ATM card, magazines, newspapers, and travel expenses. Similarly, you can deduct any charitable contributions directed towards your business such as volunteer expenses or stocks.

Avoid Overpaying Self-Employment Tax

Individuals that set out on a journey to start a new business often get lost in business activities and end up paying higher self-employment taxes that can be easily reduced. So long as the status of your small business is not finalized as an S corporation, you can avoid overpaying these taxes.

You can discard as high as 15.3% tax on your total annual income. That said, avoidance of self-employment taxes invariably leads to lower Social Security income in the foreseeable future.

Get Credit on Setting Up a Pension Plan

One of the perks of setting up a pension plan for your employees is having to enjoy $500 worth of tax credit. What’s more, is that you can quickly recover the total cost incurred on starting a new pension plan for your employees’.

Moreover, small businesses should look into converting the traditional IRA into Roth IRA. It is a great tax strategy for small businesses that want to pay taxes at a lower rate. The key is to maintain your marginal tax bracket while converting a sufficient amount for your business needs.  

Small Businesses Need to Push Income

Normally, income is carried to the next tax year so that business expenses can be retained for the present year. With this strategy, you should set limited higher marginal tax brackets when your income needs to be carried from one year to another.

Final Thoughts

Remember, the implementation of each of the aforementioned strategy is interconnected with your bookkeeping records. Nonetheless, for the sake of better managerial control, it would be wise to listen to expert suggestions of a professional tax advisor that can approach your taxes with complete objectivity.

That said, you should have the willingness to take advantage of legal measures that can help your small business get tax deductions, claim credits, and added reimbursements. These benefits ultimately circle around the tax code.

The strategic options for small business to efficiently file taxes are endless. However, it is vital that you hire the services of a tax professional that can answer your standard and technical questions with utmost satisfaction. Halon Private Client is there for you each step of the way to make sure all strategies are used.

Christopher Ragain, CPA

Christopher Ragain, CPA is the founder of Halon Tax and one of the industries top authorities on micro-business taxation and tax planning.

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