9 Tax Saving Strategies That Will Help Your Wallet

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As the saying goes, two things in life are certain: death and taxes. Each year, millions of Americans attempt to prolong the inevitable by waiting to the last minute to file taxes.

The fear of the taxman is fueled by worries of owing lots of money or being summoned by an auditor. This anxiety is exacerbated if you live in a state or country with high taxes. To learn how to decrease your taxes owed, check out this Nomad Capitalist Review to see how they can help.

Get ahead of the game this year by using these 9 tax saving strategies for small businesses that will make you look forward to tax season. 

1. Fund Your Retirement Accounts

Qualified retirement contributions can save you thousands each year. Look for plans like the Simplified Employee Pension Individual Retirement Arrangement (SEP IRA) that offer higher contribution limits than conventional IRAs.

Business owners who contribute to a SEP IRA might be able to qualify for a $500 tax credit in addition to the tax-deductible contributions you make each year.

The maximum amount you can contribute to a SEP-IRA each year is 25 percent of an employee's compensation or $56,000. This amount will rise to $57,000 in 2020. 

If you don't have a SEP IRA or only operate a side business, making contributions to personal retirement accounts also provide the opportunity for savings. For example, contributing to a 401k or 403b is tax-deductible up to $5,500.

There are income limits to claiming this deduction and you can't qualify for another employer-sponsored retirement plan to get this benefit. 

2. Max Out Your HSA

One of the many tax saving strategies many people overlook is the health savings account (HSA). Contribute to a health savings account from the previous year as a last-minute tax-saving option. 

In order to qualify, you must be covered by a high deductible health insurance plan. You can then contribute up to $3,450 for individuals and $6,900 for a family to your account. 

Make sure your HSA provider knows which year the additional contribution should be coded to. The added contribution will be counted as an adjustment to your gross income which helps to lower your tax liability. 

3. Buy Equipment New

Small business owners can deduct the cost of purchasing new business equipment including vehicles. If the items aren't bought new, you can instead write off their depreciation.

There are two common types of accelerated depreciation business owners use: Section 179 deductions and bonus depreciation.

With Section 179 deductions you can immediately write off the cost of buying an asset for your business. Bonus depreciation only applies to the first year of ownership and can range from 50 to 100 percent of the item's cost.

These percentages vary from year to year so it's always a good idea to double-check deduction amounts before purchasing equipment that won't bring the benefit you planned for. 

4. Deduct Employee Bonuses and Awards

The employee compensation withholding rate for small businesses dropped from 28 to 24 percent in 2017 under the Tax Cuts and Jobs Act. This is great news for single-member LLCs where owners pay themselves an annual salary.

One great tax-saving strategy to lower your liability further is to also pay yourself a bonus. Bonuses are taxed at a lower rate of 22 percent.

Consult with a tax professional before making major changes to your compensation as a business owner. You want to make sure you take the proper steps to minimize your risk of being audited.

5. Contribute to a 529 Plan

Most 529 plans are used to cover the cost of college tuition and expenses. Some states offer major savings on your state taxes in the form of deductions or credits when you contribute to a 529 plan. 

For example, in Idaho, you can deduct up to $6,000 per individual contributing to a 529 plan and $12,000 for married couples filing jointly. The accounts grow tax-free until the student is ready for college. 

If the child doesn't go to college, you can transfer the balance to another qualified dependent. In some cases, the 529 plan can be used to cover the cost of K-12 education. 

6. Time Business Income

The strategy of timing your business income can help you save on your taxes. Timing your income refers to the practice of moving income from one year to another.

In order to move income, you must determine which year will have the largest tax liability. The factors that contribute to your tax liability the most are income and tax rates.

Using previous years is the best way to predict income. An experienced tax advisor is the best way to determine your business tax rate.

Laws change from year to year, but an experienced tax advisor will have insight into what changes are afoot with the IRS for the coming year. 

7. Write Off Bad Debts

Bad debts are a gift and a curse. On one hand, it's a sign of a customer defaulting on payment or your own financial setbacks. 

On the other hand, the IRS offers relief to business owners suffering from bad debt in the form of a write-off. 

8. Reconsider Your Business Entity

Not all business entities follow the same taxation formula. If you have a high grossing business, for example, operating as a sole proprietorship might not be the best idea.

Incorporating your business as an S Corp or LLC filing as an S Corp gives you access to tax advantages that won't result in double taxation. This arrangement will lead to you filing a 1120S which typically brings a higher tax preparation fee.

However, if it saves you thousands per year in income taxes, it may be worth the added expense. 

9. Check for Tax Law Updates

Learning tax law updates is a must for business owners. In the face of an audit, the words 'I didn't know' will add little to no relief to your situation.

Staying updated on the tax code is usually easier said than done. Forming a relationship with a tax advisor early in the year is the best way to stay informed so that you can plan for the top tax saving strategies.

Where to Find Tax Saving Strategies

The most reliable place to find tax saving strategies is the IRS website. The IRS posts news and updates on new tax legislation as it becomes available.

The downside to checking with the IRS is that the website can read like an ancient religious text. There is no attention paid to readability or flow of information when you are researching tax saving strategies and eligible deductions.

If you want an easier time understanding where to save on your tax, hire a certified public accountant to help you understand your tax situation for the coming year. For more tax saving strategies, visit the Finance section of our blog. 

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