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Tax Planning Strategies

Strategic tax planning means, to plan tax preparation methods that utilize all available tax resources to get the lowest taxable income.

Planning a tax strategy can be difficult because there are so many tax codes. But, by learning what Internal Revenue Service (IRS) tax codes apply to you, may help save money throughout the year and at tax time.

Read below to find out how tax planning helps businesses and individuals get the most from their tax dollars.

Strategic tax planning for small business

Financial planning can have a definite influence on a business taxable income. Paying taxes can often put profitability and personal gain at risk if a business does not have a tax plan in place. Not being aware of your tax situation can hinder your company’s financial goals. It is important to have a strategy that can keep risk and return levels while allowing your company to profit.

The prosperity of a small business depends on the prompt and constant business and tax planning. This planning preparation should be shared with all family members or key shareholders, to ensure the longevity of your business.

Tax strategy tips for small business

Many taxpayers that are self-employed or own small business overlook things they can do to help stretch their tax dollars. Below are some tips, to help you plan your business tax strategy.

Business tax entity. How the company elects to be recognized by the IRS has a significant impact on how much and when taxes will be taken out. For instance, if a business is a limited liability company (LLC), they most often pay more than necessary during the year in self-employment tax. By changing the LLC election to an S-Corporation the owner can pay themselves a wage to help offset their annual tax liability.

Set payroll amounts early. Unfortunately, many business owners wait until the last minute to calculate taxable payroll. Doing so can leave them vulnerable to being audited. By doing payroll quarterly, a company can readjust it at the end of the year, to meet their taxable income.

Employ your children. This is one of the most commonly overlooked LLC business tax strategies. By employing your children who are under 18, you avoid having to pay federal tax or payroll tax on that employee. The child can take the standard deduction for that taxable year and it will not be subject to taxation.

The downside to changing from LLC to S-Corp as was discussed earlier, is the same rules do not apply, when employing your children. The S-Corp code under rules and regulations, states that you must withhold Federal tax from all employee payroll. So, many companies use a separate account for payroll involving their minor children. You must also, make sure your child has a banking account, to deposit their paychecks. This will help provide an accurate account to prove no child work/tax laws are broken.

Offer 401-K. A well planned 401(k) can be beneficial when trying to do trade in real estate, get a loan or make small business investments. In many cases, business owners can deduct a certain amount of deferral, then have it matched. Small business owners that are 60 and over can take additional deductions for being of retirement age.

Consider making your spouse a business contributor. If a spouse is willing to contribute a portion of their pay to 401-K it can be a valuable tax strategy to add them to your payroll. Otherwise, if a spouse is not interested in contributing, it may not make sense to pay employee taxes on them. Doing so would take away from tax breaks you could get by filing jointly.

Push income and expenses. When feasible, every small business should drive revenue to the next taxable year and claim expenses the present year. When juggling profits between two or more years, try to remain below certain allowed tax brackets.

Business entertainment expenses. Taking a current or prospective client or associate to dinner is a viable tax deduction. To qualify for such deductions, business discussions or actions must take place, before, after or while you are entertaining. Keep all receipts for this outing and make sure to document the nature of the business that transpired. The IRS requires this documentation before they will allow the deduction.

Business-related automobile expenses. There are many tax deductions a small business can take when they use vehicles to transport goods and services.

If the business buys a vehicle for business purposes within the taxable year, they can deduct a portion of the cost that year and the remaining portion over the course of time as the vehicle depreciates. Businesses that lease vehicles instead of buying them can deduct all their lease expenses.

Other vehicle deductions to consider are mileage, parking and toll charges that accumulate while the vehicle is being used for business. Some automobile repairs and upgrades are also tax deductible.

Tax planning for home-based business

Many business owners that work from home find it hard to decipher their business tax deductions. Because of this, they often miss many expenses that could have helped lower their taxable income.

Create a designated work space. Your designated work space can be a whole or partial room within your home. If the designated space is used solely for work, you can deduction a portion of your housing cost, utility bills, and furniture expense. The software and office equipment you used to conduct business from home is also deductible.

Business entertainment expenses. Self-employed tax payers can also take these same deductions with the proper documentation.

Automobile expenses. Self-employed tax payers can deduct the same automobile expenses as long as it is used for business purposes.

Many of the tax deductions that apply to small business, also apply to home-based businesses. If you have further questions about how to plan your tax strategy, do not try to figure it out alone, ask a Tax Expert. 

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