A small business generally doesn’t have a stream of corporate tax lawyers and accountants to plow through the ever evolving tax regulations to find all the legal methods and loopholes to reduce the tax burden of the business. This doesn’t mean if you are a small or medium enterprise (SME) owner, you should hold up the white flag in surrender when it comes to figuring out how to reduce taxes. To help this process, we have highlighted some simple legal ways to lower your tax bills:
The Internal Revenue Service (IRS) does not require businesses to submit federal unemployment taxes if you hire a spouse, parents or children. Just ensure the salary paid is commensurate to the job, otherwise the business will be disqualified from these exemptions along with being levied some additional interest and penalties.
One of the simplest methods to reduce your corporate taxes is to hire independent contractors (this method is widely used by large corporations). A business does not have to withhold any amounts from payments made to independent contractors and more importantly does not have to pay the employer’s share of unemployment, Medicare and Social Security taxes on a salary paid to an employee.
Maintain a proper record of all business expenses by collecting all your receipts. Some categories which businesses often gloss over without realizing they are deductible for tax purposes include start-up costs, reimbursement of employee expenses, memberships, subscriptions, and vehicle expenses. Even education expenses for courses, books, classes, seminars and convention fees are tax deductible if they improve your skills or your employees’ skills which are needed for employment duties.
A significant expense you may not realize is deductibles include such items as dining expenses and tickets paid for shows. You are probably aware if you go out for lunch every day, you cannot claim as a business expense. However, this changes if you are going out for drinks or having a meal (whether breakfast, lunch or dinner) with a client to discuss business matters.
In such cases, 50% of the expense is deductible, in other words, an approximate cost of entertaining your client. Any costs you incur when taking your client to a concert, show, sports event or any other such activity is also 50% deductible as long as business was discussed during the event or if the event was attended immediately following a business meeting.
Donations made to qualified organizations will provide you with tax breaks so if you have old office equipment or computer systems, give them to charity rather then put them curbside for garbage pickup. Don’t forget about the unused inventory in the warehouse. Inventories which are no longer saleable to you can also be given away to charity. The charitable organization should give you a receipt for the market value of the goods you dropped by their place. Remember any donation valued at more than $250 should have a proper receipt, as otherwise it may be rejected by the IRS.
Tax credits are magical as they directly reduce taxes and some business taxes, when not used in a particular tax year, may be carried forward to future years to reduce future corporate income taxes. There are a plethora of business credits available to SMEs. Often, federal or state governments will introduce or revoke credits so it requires a little effort to stay constantly updated in this field.
The best place to start though would be the IRS web page listing general business credits. Due to the sheer volume of available credits, we cannot provide an exhaustive listing in this article, but we have highlighted some key credits below:
· Health Insurance Premiums: A health insurance premiums credit for small businesses pertains to specific employees for whom the business pays a part of their health insurance coverage.
· Providing Employment: A work opportunity credit was designed to provide an incentive to businesses to employ people from groups which have special employment requirement or a high unemployment rate. These groups are identified by the government so you cannot just claim anyone to be part of such a group.
· Research and Development: This is a credit created specifically to encourage businesses to experiment and innovate. Not all activity qualifies as research and development so check the legislation to ensure your research is designed in a way to allow you to claim this important credit.
· Investments: Several different credits have been totaled in one titled Investment Credit.
