Taxes can be daunting for small business owners and freelancers, but they don’t have to be. The US government offers numerous ways for entrepreneurs and freelancers to legally reduce their tax bill.
How you save money depends on your company’s recurring revenue stream, but here are a few strategies that could reduce taxes: 1. Get specific about deductions
1. Deduct Startup Costs
Establishing a new business can be costly, but the IRS allows certain startup and organization costs to be deducted as legitimate business expenses. These expenses must pertain to creating or purchasing an active trade or business or investigating whether one should exist already.
These expenses typically include market research and product analysis, labor supply and location research and travel to find suppliers or distributors. You may choose to claim these initial expenses immediately or spread them out over 180 months (15 years).
2. Maximize Deductions
Astute entrepreneurs seek ways to minimize tax liabilities. Deductions such as startup costs may help them do so, or they might invest in retirement plans like SEP IRA or 401(k).
Depreciation allows business owners to write off investments made for their operations over time; however, the IRS only permits certain expenses related to start-up and organizational costs to be deducted during their first year of business operation.
Individuals may also amortize other capital expenses in stages to get maximum deductions. Consult a tax professional on which strategy would work best.
3. Consider Charitable Donations
Charitable donations can be an effective part of an overall business plan and should be carefully selected so as not to generate unnecessary tax benefits.
Consider supporting charity runs, homeless shelters or soup kitchens when considering where to donate money. Businesses could also sponsor youth sports teams as an effective way of showing their logo on uniforms and field signs.
The Biden administration and Congress are currently deliberating multiple proposals for tax reform, such as book minimum corporate taxes and changes to vesting equity compensation plans. If these proposed changes impact your corporate philanthropy activities, consult a financial advisor as to their potential effect.
4. Consider a Section 85 Rollover
Entrepreneurs often begin their businesses as sole proprietorships, amassing assets and client lists before ultimately opting to incorporate. At that point, Section 85 rollovers can help transfer them tax-deferred into a corporation.
Bob could transfer his online courses to NewCo at a predetermined price rather than their fair market value (usually calculated via CBV), thus deferring capital gains taxes and making it easier for NewCo to sell them after five years.
5. Take Advantage of Low- or No-Interest Loans
Startups require working capital in order to survive and flourish; without it, their growth may stall or even falter and cause their failure.
Entrepreneurs have the option of funding their businesses using personal savings, credit cards or home equity; others turn to crowdfunding in exchange for partial ownership in return.
An alternative solution is taking out a business line of credit, which allows you to borrow up to an approved amount at any time without applying for a loan and usually comes with lower interest rates than traditional loans.
6. Take Advantage of Tax Credits
Small business startups tend to operate on thin margins, so finding ways to save money wherever possible is essential for their survival. Tax credits provide one effective method of doing just this.
Tax credits provide businesses with an effective means to significantly decrease the amount they owe in taxes, unlike deductions, which simply lower taxable income.
An innovative startup that develops its own technology may qualify for the R&D credit, up to $250,000 each year against payroll tax, which may also be refundable.
7. Donate Inventory and Equipment
Donating inventory to charitable organizations instead of liquidators can often save money, as you can take a straight-cost deduction instead of being taxed at its fair market value – usually much lower.
Donating unwanted equipment like kitchen appliances and security cameras can earn a tax deduction; just remember to keep receipts and documentation so you can claim this expense on your taxes.
8. Overpay Your Tax Estimates
With news outlets across the nation citing an unprecedented surge in new business startups in 2022, entrepreneurs are searching for ways to minimize one of their largest expenses: taxes.
Entrepreneurs tend to juggle many roles at once, making it easy to overlook certain obligations like filing quarterly tax estimates. Here are a few quick strategies that may help avoid overpaying: