Are you looking for a way to reduce your business’s tax liabilities? Are you trying to find a method to help you reduce tax expenses and grow your business? Do you want to learn about implementing the perfect strategy according to your business’s situation? Or are you trying to investigate different ways to simultaneously lower your business’s tax liability and target growth?
If yes, you have come to the right place, as we will be answering every question that is luring around your mind and more. Let’s begin. If you aren’t aware of this, there is so much more to company taxes than just filing a payment at the end of the year.
By legal means, you can reduce that amount significantly and make yourself and your corporation less liable to taxes. Implementing these strategies as soon as possible is the best thing you can do for your business right now. When the tax season arrives, it might be too late for you to claim your deductions, and you won’t be able to reduce your liabilities.
You want to implement the strategies we’re about to provide you as soon as possible to get the most out of your tax situation.
Planning, organizing, and then paying what you owe in the form of tax can help you better your tax situation. When preparing to pay your taxes and filing them, claiming what you can reduce from the final payment you owe the government in the form of taxes is the key here.
What Is a Tax Liability?
Your federal tax liability is the total amount of tax you owe to the IRS, the state you reside in, or the local government, depending on where you’re a national. These taxes will include the total amount of tax, including tax on capital gains, self-employment taxes, and any other federal tax you might think of falls into this category.
With that said, you should know that tax liability is not the same as the amount you owe to a separate power when you pay a tax return. Let’s say, for example, you owe the state about $ 5,000, and at the end of the day, you end up paying an extra $1000 from your bank account; this extra money you deposited as a taxpayer is the tax liability, and you paid it to the IRS.
Tax debt from older years also includes any unpaid tax liability from each year as well as the penalties and interests that have occurred since those taxes should have been paid. Your tax liability will remain $6000, taking the above example into consideration, regardless of the amount you pay once you file your return or even if you end up getting a refund.
You can have a tax liability even if you receive a tax refund. So, in simple terms, your tax liability is the amount of tax you pay with your tax before you make any payments.
How To Reduce Your Tax Liability?
The most straightforward way to reduce your company’s tax liability is to reduce the amount of income subject to the total tax. You can time your business expenses and make some careful investments to take advantage of the situation. There are many strategies you can implement to reduce your company’s tax liability. Without any further ado, let’s get into it.
Know And Understand The Deductions You Can Make Each Year:
Many small business owners are unaware of possible deductions and are missing out on money that can be saved each year, exclaimed Gary Milkwick, who was a chief financial officer at 1-800Accountant.
He further explained some common business liability deduction strategies as available opportunities to reduce your tax liability:
- Expenses and mileage for business purposes.
- Cell phone bills for phones are solely used for business.
- The cost of operating a home-centric business, such as a portion of your mortgage and rent.
- Half of (50%) meal and entertainment expenses with potential or existing business partners, employees, contractors, and clients if you meet IRS requirements. You were able to deduct 100% of your entertainment and meals expenses during the pandemic of covid-19. However, that opportunity has expired, and now you’re able to deduct only 50% of such expenses.
- The cost that comes with purchasing business-related equipment, such as computers, monitors, phones, and printers.
- Credit card processing, including bank fees.
- Self-employed health insurance and contributions to savings account.
- Setting up and contributing to your retirement plans.
Making Smart Payments And Investments:
Suppose you’re planning to invest in some new equipment to better the work experience of your employees. In that case, the timing of those purchases will help you immensely when reducing your tax liability for the same year or even the next year, depending on when you purchase your items.
Start planning your purchases and investments for the entire year in January, much like Milkwick explained. Time your purchases wisely.
He further discussed your position if you’re in November and are planning to purchase certain equipment within the next several months meant for your business expansion; for example, it would make much more sense for you if you accelerate the purchase before the end of the year, this will help you avail the tax deduction of the present year keeping you eligible for the available deduction of the upcoming year.
Milkwick explained that the same goes for services. If it’s towards the end of the year and you’re planning to run large campaigns to better and improve your business, then it would make much more sense to pay the due amount in the previous year to get the deduction in the current year.
Other than that, if you believe to have a lower income in the current year and you’re expecting to get more returns in the upcoming year, you can always consider postponing your business expenses till at least the 1st of January. It will allow you to enter next year, and you won’t be liable for much tax the latter year.
The idea here is to present your taxes and match them along with your payments, so if you’re presently in a higher return year than normal, try managing your income likewise. This will allow you to manage your deductible liability much more effectively.
With that said, are you in possession of some spare cash you’re planning to make some investments with? If yes, always consider the tax-friendly opportunities you can avail to decline the load of payable taxes from your shoulders.
Consider writing off a significant portion of initial investments, especially in areas like real estate, oil, and gas. As explained by Casey Minshew.
“Oil and gas investments that pass through ‘intangible drilling costs’ help reduce an investor’s taxable income, as they can take these costs as active deductions against their earned income,” Minshew further said. “This can generate up to a first-year return of 30 percent based on tax benefits alone, even before a drop of oil has been produced.”
Don’t Confuse Tax Flow With Taxable Income:
Business owners often think that all cash flows are taxable income while all cash outflows are deductions. Milkwick explained this phenomenon by telling us that, in reality, the nature of cash inflow or outflow is determined by the investigation of whether it is taxable or not.
The income from the sales of services and goods is taxable. However, some common incomes that are not taxable by the company consist of bank loans. As Milkwick explained, these loads are not deductible until the business spends the money.
Another common mistake made by business owners is to assume that all deposits are income, including bank transfers and even refunds. Focus on your deposits to make sure that no taxable deposits are counted as “income.”
Put your complete focus on determining if the deposit can be counted as income and determine that by first noticing if it’s taxable or not; this will help you deduct your taxes.
Invest In Your Employees:
One of the best ways to reduce your taxable income is to reinvest your profits into your business. You can always manage to better your business and deduct your liabilities by reinvesting your money in your employees. This reduces your tax burden while also helping your team succeed and improve their work environment while boosting their productivity, which will help your business grow taller. Employees will also generate a better environment.
If you want to do so, implement this strategy by increasing salaries, wages, bonuses, and other compensations to pay employees in a given year. These are generally tax deductible if they fall into the standards of this criteria:
- The compensation made must be both necessary and ordinary.
- They were paid in the present year.
- They paid for services actually provided to them.
- They are of a reasonable amount.
Contributions to employers’ and employees’ accounts’ are tax deductible as well. What the IRS has determined for the people is that they may deduct 401(k) contributions up till they refrain from exceeding the limits set by section 404 of the Internal Revenue Code.
In addition to this, you can avail more benefits rather than just this one by simply reducing your tax liabilities. You can offer your employees matching, profit sharing, and safe contributions to boost their morale, and this will, in return, give you the loyalty of your employees most businesses are continuously searching for.
Doing this will also enable you to be more open when receiving the top talent in your field while also attracting growth to your business.
Hiring Family Members:
If a family member lends you a hand or works in your business, consider paying them as employees. This way, they can contribute to their wants and needs, and they won’t feel like you’re burdening them whenever they work to benefit your business’s potential growth.
Other than that, If your children want to understand your business or if they want a job under your name, you can benefit them as if they have any friends looking for the same benefits as them; doing so will help your business out and pay salaries to children can lower your overall tax liabilities as your children are most likely in lower tax brackets as you are.
Other than that, another important benefit of this situation is that you don’t have to pay your children social security or Fundamental Unemployment Tax (FUTA) and include these terms in their salaries, which will save you.
How Can Credits Reduce Your Tax Liability?
You can utilize the power of tax credits to reduce your tax liability; this is one of the best ways. Unlike tax deductions that reduce taxable income, tax credits reduce the tax you owe per dollar. Many tax credits are available for businesses, such as general businesses, taxes for employment provided child care support.
That said, you should also know that your business might remain eligible for tax deductions more than once a year. If that happens, you might be able to take this to your advantage by implementing one of the two strategies:
- Apply the tax credit to previous years when you didn’t exceed your credit limit. You will receive a retroactive refund in this manner.
- Carry the credits and implement them onto the next year’s tax.
Many states also offer tax credits to encourage economic growth and business investment. These vary among different states. However, many are awarded to businesses that end up increasing employment, use local resources, or are operating in underdeveloped cities or regions.
Your state’s related department will have enough information on the matter for you to know and involve the facts in forming a better strategy for your business taxation liabilities reduction.
Most taxpayers aren’t aware of how they can reduce their taxation liability through legal means, which is why we have provided every bit of information you need. You can implement different beneficial placements for both the growth of your business and tax liabilities reduction, for which you will have to acquire information on the matter, which is where we come in.
We have provided the necessary information you need on this topic, which you can now implement and generate an effective means for reducing tax liabilities from your business.