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10 Common Strategies for Small Businesses to Minimize Taxes in the US

July 26, 2022

Small business owners can minimize taxes through various legitimate methods. You can significantly reduce the tax amount through proper tax planning.

In this blog post, our professional certified public accountants (CPAs) have revealed 10 ways small business owners can reduce taxes.

1. Know about IRS Requirements

Small businesses in the US must follow IRS requirements to the letter. Not meeting the requirements of the tax authority when filing taxes can result in penalties and fines. Some of the penalties that the IRS imposes on small businesses include the following.

  • Failure to submit the tax file within the due date
  • Failure to disclose all income in the tax report
  • Bounced checks
  • Mistakes in the tax report

You can reduce most of the tax preparation mistakes by hiring the services of outsourced bookkeeping service providers for tax filing. The professional CPAs at the outsourced bookkeeping companies make sure that the accounts of the company record all income and expenses. This helps in creating an accurate tax report thereby avoiding heavy fines.

2. Know about Allowable Deductions

After the passing of the 2017 Tax Cuts and Jobs Act (TCJA), businesses are allowed to write off certain expenses during a single taxation period instead of over a number of years. The Section 179 accelerated deductions cover different types of purchases including:

  • Vehicles
  • Computers
  • Software
  • Building improvements

Businesses can deduct expenses of up to $1.05 million. You can claim deductions from the income tax if the asset was purchased and put into use by December 31 of the year.

In addition, small businesses owners are also allowed Qualified Business Income Deduction (QBID) as tax rules. Section 199A allows businesses to deduct up to 20 percent income. The qualified business income dedication can apply to capital gain and income limits for people in specific sectors.

3. Plan Purchases Strategically

Businesses have the flexibility to purchase items during any accounting year. You can optimize tax savings if you delay purchase of items when income is greater that results in a higher tax bracket. Deducting purchases during the year will result in greatly reduced taxation.

4. Invoice Your Customers Smartly

You can also strategize your income to reduce the tax bill. You can lower your tax bill if you delay sending an invoice to your customers so that some income appears in the next tax year. You should delay invoicing in a tax year when you generate above average revenues. You can reduce the income tax if you delay sending the invoice to the next tax year.

5. R&D Tax Credits

R&D tax credit is one of the most overlooked deductions. The expenses are not just for large companies. Small businesses can also include R&D expenses to reduce tax due. This allows businesses a great opportunity to recoup the cost of research and development to come up with innovative products.

You should include R&D expenses if you have invested in data science or engineering projects to discover new and improved products or services. This strategy will help offset the labor and other overhead expenses of a business.

6. Deduct Retirement Contributions

Businesses are also allowed to deduct certain contributions. The IRS allows retirement contributions of up to $19,500 and an additional $6,500 for people over 50. Including the contribution in the tax report will help reduce the taxable account.

In addition, certain contributions provide tax benefits. Roth IRA contributions offer tax benefits since you can deduct funds without incurring taxes during retirement.

7. Deduct Charitable Contributions

You can also deduct charitable contributions to reduce taxation. Consolidated Appropriations Act  (CAA) Section 212 and 2013 allow individuals to deduct up to $600 for married couples and $300 for individuals.

8. Deferred Payroll Taxes

Taxation rules allow businesses to delay remitting payments to the staff during the next accounting year. The accounting rule results in less taxation during a year. You can avail this opportunity if the payroll is due at the end of the accounting year. You can pay half of the payroll during one period and the remaining period in the next.

You should record higher payroll in the year with a higher income. The strategy will help reduce the income due to the IRS.

9. Know About Tax Credits

The IRS allows tax credits for various actions. Businesses can avail tax credit for their green initiatives. In addition, hiring disabled employees can result in tax credits. Consider contacting a professional accountant to know about the tax credits allowed to your business.

The tax credits can significantly reduce the tax due to the IRS. So, it’s worth the time to understand the tax credits allowed for small businesses.

10. Accurate Bookkeeping is Critical

Accurate bookkeeping is important to reduce tax due to the IRS. You need to provide business records and documents such as invoices to prove the expenses. Hiring the services of a professional outsourced bookkeeping firm will help you maximize the opportunity of reducing taxes.

You must maintain a record of each business expense throughout the year. Make sure that you record receipts and other physical or digital evidence of each expense.

Consider preparing estimated tax due each quarter. This will make it easier to prepare the tax file at the end of the tax year.

Conclusion

As a small business owner, you should ensure that you make the most of the opportunity to minimize taxation due. You can save hundreds of dollars each year by keeping accurate bookkeeping entries. Make sure that you separate business and personal expenses. The business expense should be clearly marked and kept separate from the business expenses.

Always make sure that the bookkeeping records are accurate. Make sure that there are no mistakes in the financial statements. Your firm will have to pay a heavy penalty if the IRS detects errors during an audit of the accounts.

Maxim Liberty has a team of CPAs who can record transactions without any errors. The record of accurate financial statements can help in tax preparation. Get in touch with us today by dialing (703) 957-6938.

Maxim Liberty is a leading bookkeeping company with over 10 years of experience helping small businesses manage their finances. Passionate about making bookkeeping simple and stress-free, we share practical tips and insights.