Owning a business comes with many responsibilities – including complying with federal, state, and local tax obligations. While paying steep taxes can cause considerable financial strain for many small business owners, there are a number of strategies that can be implemented to reduce your tax burden. By taking a few proactive steps, you can retain more of your profit and boost your bottom line.

Here are five ways to reduce your business taxes:

1. Choose a Tax-Efficient Business Structure

It’s vital to choose the right structure for your business, whether you select a sole proprietorship, partnership, LLC, S corp, or corporation — each entity type is treated differently for tax purposes. For instance, some structures offer “pass-through” taxation, allowing owners to avoid double taxation. Other structures may offer better tax treatment for certain deductions and fringe benefits. It’s best to consult with a tax professional who can best advise you based on your specific objectives.

In addition, as your business grows, you might consider changing structures to maximize your tax benefits. While many businesses start as sole proprietorships, switching to an LLC or S corp can offer more flexibility once your business starts generating significant revenue.

2. Maximize Your Deductions

Many expenses connected to your daily operations may help provide you with a tax break. Also referred to as a “write-off,”” a tax deduction is a business expense that you can deduct from your taxable income for the year. However, the IRS has specific criteria that must be met in order for a business expense to qualify as a deduction — the expense must be both “ordinary and necessary.””

Some common tax deductions for businesses can include the following:

• Advertising costs
• Business cell phone use
• Office supplies and equipment
• Travel and mileage for business purposes
• Employee wages and bonuses
• Business insurance
• Depreciation of furniture, equipment, and other business assets
• Education courses that improve the skills required for your business
• Interest on business loans

It’s essential not to overlook these expenses, as they could potentially save your business a substantial amount of money in taxes.

3. Delay Recognition of Taxable Income and Accelerate Deductions

If you’ve had a profitable year, you might consider delaying recognition of some of your taxable income until the following year, while accelerating deductible expenses into the current year. This can help to minimize your overall tax burden and reduce your tax liability.

A common strategy used to defer business revenue is delaying collections. You can easily postpone income by sending out invoices in late December to avoid receiving payments until the following tax year. Similarly, you can prepay deductible expenses in advance, such as rent, utility bills, insurance, and employee bonuses. But if you anticipate earning more in the following tax year, it may be more advantageous to reverse this approach by accelerating your income and deferring deductions until January.

4. Take the Qualified Business Income Deduction

If your small business is structured as a “pass-through” entity or a sole proprietorship, you may be able to take the qualified business income reduction. This can allow you to exclude 20% of your qualified business income from federal income tax — as well as 20% of qualified real estate investment trust dividends and qualified publicly traded partnership income — regardless of whether you itemize. However, there are certain rules and income limits associated with this deduction, so it’s best to consult with a tax advisor to determine your eligibility.

5. Equipment

Reinvesting profits back into your business can help reduce your tax burden, while optimizing your operations and preparing for future growth. For example, you may use some of your revenue to purchase a new piece of equipment, your deduction is allowed in the year you place the equipment in service, regardless of when you pay for it.

Contact an Experienced Tax Professional

If you’re a small business owner, having a knowledgeable tax advisor by your side is vital to help ensure you achieve your financial goals. Based in Fairfield, Connecticut, Rolleri & Sheppard CPAS, LLP offers business owners assistance with tax planning matters, providing tailored strategies to reduce their tax liability and maximize their profits. Contact us online or call (203) 259-CPAS to schedule a consultation.