High taxation remains a significant concern for small and medium-sized businesses (SMBs). It’s like nearly all tax regimes around the world are designed to nip startups in the bud.
As a small business owner, every penny counts. Sometimes, minimizing taxes may be the only way to stay afloat.
In this post, we shall uncover 5 innovative tax-saving strategies for small businesses.
Hire a Family Member
Employing a family member is one of the most effective ways of cutting operational costs for small businesses.
It’s not like you’ll have your relatives work in your business for free. However, working with a relative is more accessible and more affordable than other salaried employees.
Most family members will understand when the business is down, and some will even help you strategize on ways to boost your revenue. A relative is also unlikely to leave your business for your fiercest competitors. And the best part is that the Internal Revenue Service (IRS) provides various options for SMBs seeking to engage family members in their businesses to reduce taxes. The regulator even allows you to hire your children as long as they meet certain laid-out conditions.
When you engage a family member, you’ll be eligible for lower marginal tax rates and plenty of other benefits.
For instance, sole proprietorships aren’t required to pay Medicare and social security taxes on the wages paid to their children. Sole proprietorships are also exempted from paying the Federal Unemployment Tax Act (FUTA) tax.
Invest In Productivity Services
At first glance, this may not seem like a tax-saving strategy for small businesses. You may need to take a second look to appreciate the significant role that productivity services play in the success of SMBs.
The good news is that there are tons of productivity services you can invest in, with a handful of them available to small businesses at a reasonable fee.
One notable productivity service that you can consider is a mail forwarding service. As the name implies, a mail forwarding service is a mailing service that redirects incoming mails automatically to other addresses of your choice.
Investing in a professional mail forwarding service can automatically help you save time by forwarding your emails to your clients, employees, and business partners. Whether you’re out of the office or traveling, you can be sure that your emails reach the intended recipients each time.
Besides mail forwarding, other standard productivity services include bulk payment services, staff collaboration services, inventory management services, etc.
Capitalize On Home Office Deductions
COVID-19 continues to wreak havoc on the global economy, with small businesses bearing the brunt. The highly infectious virus has forced many businesses to close down their commercial locations and operate from home.
But unknown to many SMBs, this might be a blessing in disguise.
As a commercial office, there are expenses to incur in your home office. However, the IRS allows SMBs operating from home to deduct certain housing expenses on their annual tax return. Some of the expenses you can target for deductions include utility bills, interest advanced towards your home’s mortgage, and property taxes.
So, if you operate your business from home, you might want to check if you’re eligible for home office deductions.
It will also interest you to know that the IRS allows both property owners and renters to claim home office deductions. Plus, these deductions apply to all types of homes, ranging from studio apartments to houseboats.
Change the Structure of Your Business
Businesses fall under five main categories depending on their structure, including;
- Sole proprietorship – A business run and owned by one person (known as a sole proprietor).
- Partnership – A business run and owned by two people (known as partners).
- Corporation – A business owned by shareholders.
- Limited Liability Company (LLC) – A hybrid type of business that merges some features of partnerships and corporations. Members run lLCs.
- Co-operatives – A business that’s operated for the benefit of people using its services.
Each business structure comes with specific tax implications. For instance, corporations tend to attract higher taxes compared to other business structures. LLCs and cooperatives usually follow in that order.
So, if your small business is registered as a corporation, limited liability company, or co-operative, you might want to change to sole proprietorships or partnerships. Note that the process may be a bit intricate and might require the intervention of a corporate attorney.
Track and Take Charge of Your Expenditure
Last but not least, you can reduce taxes on your small business by tracking your monthly expenditure.
One way to monitor your business expenses is to perform most of your operations online, especially payments and procurements. You can also make arrangements with your bank to offer monthly reports on all your income and expenses.
Better yet, you might consider investing in accounting software like Quicken or Quickbooks. These apps are especially useful in determining your deductible expenses.
You can also track your expenditure by planning your taxes using tax software like TurboTax.
TurboTax will help you to prepare and file your tax returns online. The app is also generally more straightforward to use and more accurate than filing your tax using paper returns.
The Bottom Line
There are numerous effective ways to reduce the taxes on your small business. Many of the above-highlighted tips will not only reduce taxes on your SMB. They’ll also help to lower your overhead costs.