If you’re a small business owner, effective tax planning is a crucial financial tool. It can help minimize your tax liability, create opportunities for reinvestment, and boost your bottom line. Tax planning can not only lead to immediate financial relief, but also help you achieve long-term financial growth and success. A tax professional can help you develop a tailored strategy to ensure you comply with your tax obligations without overpaying.

Here are several tax tips to keep in mind that can help your business lessen its tax liabilities and maximize savings:

Choose the Right Structure for Your Business

The structure you select for your small business can make all the difference when it comes to your tax situation. While sole proprietorships are easy to set up and manage, they do not necessarily have the same tax advantages as formal entities, such as LLCs or corporations. Each business entity type has different tax implications that must be carefully considered:

• LLCs — The primary benefit of an LLC is pass-through taxation. An LLC is not taxed on its profits, but rather, the income and losses are passed through to the owners on their individual tax returns to avoid the double taxation of C-corporations. However, LLCs have flexibility and can elect to be taxed as a sole proprietorship, partnership, or even an S Corporation or C Corporation.
• S-corporations — S-corporations avoid corporate taxes by allowing profits and losses to pass through to the personal tax returns of the shareholders. Owners can pay themselves a reasonable salary subject to payroll taxes, and any remaining profits can be taken as distributions which are not subject to self-employment tax. This can lead to substantial tax-savings, compared with LLCs, where the company’s entire profit may be subject to self-employment tax. You can also benefit by paying your state taxes using pass through entity tax, thus lowering your federal tax burden.
• C-corporations — C-corporations are considered separate legal entities from their owners. The profits are taxed at the corporate level and again on the individual level, once they are distributed to the shareholders as dividends. To potentially minimize the tax burden, C-corps can offer tax-advantaged fringe benefits, leverage business expense deductions, defer income, and optimize shareholder compensation.

When choosing a business structure, it’s essential to consider your business size, revenue, long-term goals, and the level of liability protection you will need. A tax professional can help you select a business structure that meets your financial objectives — and maximize your tax return.

Claim All Eligible Tax Deductions

Small businesses are entitled to a wide range of tax deductions. Also referred to as “write-offs,” tax deductions are expenses incurred during the course of running a business that can be subtracted from your gross income. This reduces your taxable income, resulting in a lower tax bill.

Some common tax deductions for small businesses include the following:

• Rent and utilities
• Office supplies and equipment
• Vehicle and business travel expenses
• Professional fees
• Business insurance
• Advertising and marketing
• Ordinary and necessary business expenses
• Depreciation

Notably, Section 179 of the tax code allows businesses to take an immediate expense deduction for the purchase of depreciable business equipment, instead of depreciating it over time.

Maximize Retirement Contributions

Maximizing your retirement contributions can reduce your current tax liability, while planning for the future. Additionally, small businesses can benefit from offering retirement plans to employees. Businesses with 100 or fewer employees earning at least $5,000 in the prior tax year are eligible for a retirement plan startup cost tax credit. Thereafter, contributions made to your employees’ retirement plans are generally deductible as business expenses.

Consider Hiring Family Members

Hiring family members isn’t only advantageous to fill key positions in your business — it can also offer several tax benefits. For instance, wages paid to children under 18 may be exempt from Social Security and Medicare taxes. In addition, if you structure your spouse’s pay and benefits correctly, you can save a considerable amount in taxes. In many cases, you may be able to pay your spouse tax-free employee benefits, rather than taxable wages. Also, by hiring your spouse, you can double your retirement plan contributions and effectively double the savings that comes with it.

Pay Quarterly Estimated Taxes on Time

If you own a small business, it’s important to pay your quarterly estimated taxes on time to avoid incurring significant penalties and interest. Quarterly payments cover your total tax liability, including income tax on the profit your business made, self-employment tax, and any other applicable taxes. These taxes are due on the following dates:

• April 15
• June 15
• September 15
• January 15

There are two ways to calculate quarterly tax payments. You can calculate a year’s worth of income and deductions, and divide it by four — or you can calculate what is owed each quarter based on what you have actually earned. Critically, if you don’t pay enough in estimated taxes, you could receive an unexpected tax bill in April. It’s best to work with a tax professional who can help you avoid underpayment penalties.

Contact an Experienced Tax Professional

If you’re a small business owner, a tax professional can help reduce your liability and optimize your returns. Based in Fairfield, Connecticut, Rolleri & Sheppard CPAs, LLP helps individuals and business owners navigate the tax regulations and understand their obligations. Contact us online or call (203) 259-CPAS to schedule a consultation.