You are doing business for profit but being a taxpayer is not easy. Right? Giving away a big chunk of your hard-earned money to the government every year seems like a pain in the head. But the good news is that the Internal Revenue Code provides many tax breaks to businesses and individuals. And there are also many tax-saving strategies that companies can apply to reduce tax liabilities.
Consider the following methods to reduce the amount of tax you have to pay.
What Comes Under Deductible Expense?
A deductible business expense includes both ordinary and necessary. As the name suggests, the ordinary expense is common and accepted in your business. In contrast, the necessary expense is helpful to run business operations.
To run business operations smoothly, you need to keep the following expenses separate from business expenses:
- Personal expenses
- Capital Expenses
- Expenses of Cost of goods sold
Methods To Reduce Tax for Business
While any entrepreneur can use these methods to save tax from business, sometimes, related matters are not that straightforward. And as a layman, you may not be well versed with the laws and procedures of the government. You can hire a lawyer to handle your legal matters or keep a full-time resource for these procedures. And if your resource is just a graduate, you can always encourage them to learn more. Nowadays, online education has made it feasible for full-time employees to continue higher studies. You can help your resource enroll in an online tax llm degree, which will benefit you and him.
Meanwhile, let us explain to you the ways through which you can avoid paying massive taxes.
Hire a Family Member
As per the Internal Revenue Service (IRS), if their parent employs a child below 18 years. Then the owner is not liable to any social security and Medicare taxes on the salary he pays to the child. Moreover, you are exempted from Federal Unit Tax Act (FUTA) regardless of the type of business if your parent, spouse, or child is working under you. However, the federal authorities demand you to justify the source of earnings.
You can add to the tax deductibles by providing your employed relative with the employment benefit that other companies offer to their employees. These benefits may include retirement plans like Individual Retirement Account (IRA), 401 (K) plan, etc.
Invest in a Retirement Plan
You may not be getting the contribution into your retirement savings through 401 (k) from your employer. Still, through solo 401(k), you can invest in your future in a better way. According to the IRS, in solo 401(K), you are allowed to contribute in the form of two different entities, i.e., employee and employer.
- As an employee, you can contribute up to 100% of your earned income to $19,500 in 2020 and 2021. And if you are 50 or older, you can contribute $26,000 in 2020 and 2021.
- As an employer, you will be adding 25% of the total compensation. However, the total amount should not exceed $57,000.
You can also choose from other retirement plans such as ROTH Individual Retirement Account (IRA), simple IRA, 403(b) plans, etc. Once you have invested in a retirement plan, you will have less taxable income, which means you will be saving tax.
Get Health Saving Account
Saving for health expenses is simply the best decision an individual could take. There are good and difficult times; a proactive approach saves you from a lot of trouble later. Even though your insurance company offers you medical services, you must combine your workplace medical insurance with a Health Saving Account. To cover the expenses like vision and dental care that do not come under your insurance plan.
HSA gives you a break from three very significant tax amounts, i.e., Federal Insurance Contribution Tax(FICA), state or local taxes, and federal income tax. The good news is that withdrawals from HSA are tax-free.
Give Away in Charity
As much as it is your social responsibility to pay from your income for a good cause, it also helps your team get involved in a meaningful activity. And while you’re making a difference in the lives of those in need. You’re also benefiting your business by claiming a tax deduction. Yes, the amount you give to charity gets exempted from tax. However, for pass-through companies, there is a limit to your charitable gifts in 2021.
Install Tax Filing Software
Although many businesses use this software to reduce the headaches through seamless tax operations, it is also an exciting way to save yourself some tax.
Often, businesses fail to file tax returns due to one reason or another. There are glitches almost all the time while filing returns manually. It wastes plenty of the productive time of an entrepreneur and yet lacks accuracy. Tax Filing software like TaxSlayer and TurboTax play quite a crucial role in this respect. You may file your return with complete confidence, knowing that you will get reimbursed for every cost and penalty assessed.
Save from Your Home Office and Cars
You don’t realize how much you can save if you keep your personal and business expenses separate. Suppose you are using your home as an office and your car for your business operation. In that case, you have all the rights to deduct the amount in the form of rent, utility bills, repairs, internet services, insurance, fuel, car depreciation, and other services. You can use tax software to do the math for you.
Now that you know how to save your business some tax, start applying them practically at your earliest and invest in your future. Moreover, it is your hard-earned money, and you have all the rights to save as much as you can, so do not dither and go for it.