Q: As a small business owner, how can I reduce my tax liability?
–Skeptical Business Owner
A: Dear Skeptical:
First and foremost, you need to make sure your business is incorporated using the entity structure that will maximize your tax savings. For many solo and small business owners, that will be an S-Corporation or mean being taxed as an S-Corporation and paying yourself as a W-2 employee through a payroll service. Contact us if you’d like specifics and an analysis of your business entity structure.
The next answer is to deduct every business expense that is allowed by law from your gross income.
For example, if you are in your first year of business, you can deduct up to $5,000 of your startup costs. This includes typical business needs such as equipment, supplies, and operational fees.
If already established, you probably know that larger, more expensive equipment must be depreciated. This is true if an item will be used over multiple years. A pro-rata amount is deducted for each year in use. There is, however, a temporary deduction for 2016 known as a Section 179 deduction that will allow you to deduct all of the cost of new or used equipment and software purchased before December 31, 2016.
Contributing to a retirement account can also reduce your tax liability. You can contribute $5,500 each year, and if married, the same amount for your spouse. In addition, as a business owner, you can set up an employer plan, which allows you to contribute another $5,500 on behalf of the business.
Home office expenses are another deduction that small businesses can deduct against gross income. You can deduct a portion of mortgage interest, utility costs, repairs, and even depreciation if you operate from an office at home. The space must be used only and regularly for the business. The square footage is calculated as a percentage of the entire home, and that percent is applied to the eligible expenses.
Finally, don’t want until it’s too late to strategize. Contact a Creative Business Lawyer® for a LIFT Audit of your business and we can refer you to a tax advisor or work with you and your existing tax advisor to proactively plan to reduce your taxes significantly if we get started now.