7 Small Business Tax Planning Tips

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The estimated average effective tax rate on small businesses in the United States is about 20%. 

How much you pay in taxes can have a lot to do with how your business is structured and the tax plan you make. 

No one wants to talk about taxes, but it is an essential part of any business planning. 

Let's take a look at seven small business tax planning tips. 

1. Take Care of Your Payroll Early 

It is not uncommon for small businesses to wait until the last quarter of the year to complete their payroll. What they might not know, though, is that this can be something that stands out to the IRS and leads to an audit. The IRS looks at payroll very carefully because this is where a lot of book-cooking happens due to how much room there is for ambiguity. 

This means that you want to thoroughly fill out your payroll early. If you're creating a new small business tax plan, this is one of the places that you're going to want to focus on in order to have your filing go as smoothly as possible. 

2. Make Sure You're Classified as the Right Kind of Business Entity 

No matter how small or large your small business is, it's incredibly important to make sure you're classified as the type of business entity that will be most favorable to your business. If your business has been previously misclassified, that's something that you're going to want to fix as soon as you can. 

Determining what kind of business entity your small business is can be complicated. Luckily, any competent tax professional will be able to help guide you in determining which type of business entity you should be. 

3. Track All of Your Expenses 

When you're building a new tax plan for a small businesses, one of the most important things is to track all of your expenses. Even if you're working from a home office, there are certainly a lot of business related expenses you are making. 

Most people know that buying printers and computers are something they can deduct from their taxes. However, it isn't just big things that can be deducted. Things like office supplies and your landline can also be deducted. 

If you entertain clients at the office, you can even deduct things like coffee! Make sure that your records are meticulously kept, as the IRS is aware that people try to fluff-up home office expenses. 

It's important to have a designated spot for all of your receipts. Don't get rid of them after you file, either. Keep them safely long after you file, so you will be prepared if you do ever face an audit. 

Keep Up With Tax Law Changes 

Staying informed about tax law changes is crucial for small businesses as it empowers them to effectively plan their taxes and remain compliant with evolving regulations. For instance, in the context of Colorado sales tax filing, being aware of any alterations in thresholds, rates, or reporting requirements can help a business streamline its processes and avoid potential penalties. Regularly updating your knowledge about tax laws enables you to make informed decisions, take advantage of available deductions, credits, and incentives, and ultimately optimise your tax strategy to minimise liabilities while maximising savings.

4. Utilize The Company Retreat Advantage 

When you think about taxes, you probably don't think about taking your staff on a group building outing or retreat. However, there has been a federal tax loophole since the 1990s that makes it so you can claim entertainment on your taxes. 

To be clear, it is important that at some point during the trip you discuss business. That means that if you are taking your company on a beach retreat, make sure you plan for an afternoon seminar where you discuss plans to increase sales next quarter, or something to that effect. 

5. Give to Charity 

This isn't something that works in every instance, so you will want to talk with a tax specialist about whether or not charitable giving can work as a part of your small business tax planning. 

One great thing about this strategy is that giving to charity can both provide your business with a tax deduction and provides a means for you to be a socially responsible business. It also provides the opportunity for your employees to engage in activities that they find meaningful. 

It is important that you recognize that this might not be appropriate if you have a pass-through business. A pass-through business is a S corporation, sole proprietorship, or partnership that isn't subject to corporate income tax. This is because the Tax Cuts and Jobs Act placed a cap on state and local taxes personal itemized deductions. 

Basically, if you claim the standard deduction on your taxes, then you won't be able to write off the money you gift to charity. When building a new small business tax plan, you'll want to talk with a professional about any giving strategy you might come up with. 

6. Establish a Tax-Favored Retirement Plan 

Another thing many small business will do is take advantage of the small business retirement plan tax credit. Not all small businesses will qualify, so you'll want to do your research or check with a professional. 

7. Hire a Professional 

Taxes are complicated, frustrating, and time-consuming. Unless you have a knack or a special interest in accounting, it can make a lot of sense to talk to a tax specialist. 

Even if you don't have a professional do your taxes, it's a good idea to hire someone to help advise you when creating a new small business tax plan. 

Small Business Tax Planning: No One Likes It, But It's Incredibly Important 

Let's face it, no one gets excited to do their taxes. However, with proper planning, you can ensure that your filing goes smoothly every year. It's much better to plan ahead and set up a seamless plan than to have to deal with an audit down the road. 

Did you find this article about small business tax planning helpful? If so, be sure to check out the rest of our blog for more informative and useful content! Visit the Finance section for more frugal taxes help.

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