Taxes are complicated and get changed all the time. Just recently, Trump has signed the New Covid Act that will make significant amendments to current tax policies.
As a business owner, it is important to have up-to-date understanding of tax laws not only to make sure you are complying accurately, but also to know money-saving strategies when paying your taxes.
Here are important tax planning tips for business owners:
Consider whether your business can qualify for different tax treatment
In recent years, the government offered new tax deductions for both pass-through and corporate entities. Businesses structured as pass-through such as sole proprietorship, partnerships, S-corps and sometimes limited liability companies (LLC), may be eligible to deduct up to 20% of their QBI.
The main catch are the limitations and complicated rules to follow. For pass-through business owners who are taxed at a high tax bracket, you may consider switching to C Corporation. After the Tax Cuts and Jobs Act of 2017 (TCJA) the highest corporate income tax is now reduced from 35% to 21%. Before doing so, it is imperative to understand the tradeoffs that go along with the change.
Know and maximize your deductions
Another vital tip to lower your tax bill is to thoroughly account for deductions. Tax deductions are expenses that can be subtracted from adjusted gross income in order to reduce your tax liability. For instance, if you have been running your business from home during the pandemic, you may qualify for home office tax deductions.
A home office deduction requires your home office to be your principal place of business. It should also be used solely and consistently for this purpose.
For business travel deduction, standard mileage rates for use of car, van, pickup or panel truck will be 56 cents per mile, starting in January 2021. You have the option of claiming this or a percentage of your actual expenses instead, plus other qualified related expenses. Other top deductions you may apply for include equipment, services, rent, advertising, salaries and tax depreciation. It is extremely important to understand what deductions you are qualified for so you can maximize their usage.
Establish and pay retirement
One of the smartest ways to lower your business’ tax liability is to set up and contribute to retirement plans. Business owners have various options for employer-sponsored retirement savings accounts, such as SIMPLE IRA, SEP IRA, 401(k), and profit-sharing plans. With any plan, the contributions you put for yourself and your employees may be tax-deductible. Choosing the right plan depends on your business’ goals and needs.
Every business requires different tax reduction strategies. As a new year approaches, business owners will need to adapt to the coming changes and challenges of tax planning. To make the most of the deductions available to you, you can book a commitment-free consultation with us at