Tax Strategies for Small Businesses: Maximizing Deductions and Minimizing Liabilities

One of the most crucial aspects of financial management for small businesses is business taxes and understanding the intricacies involved is vital for business owners to implement strategies for tax planning, ensure compliance with tax laws, and optimize their financial health. This is why we’re demystifying small business taxation, exploring the importance of tax planning, and how Taurus CPA Solutions can help with your tax prep and planning needs.

Understanding Small Business Taxes

Business Entity Types

There are various legal forms that small businesses fall into, each with its own tax implications. The simplest form a small business takes is a sole proprietorship, where the owner of the business reports the business income on their personal tax return. Next, we have LLCs. An LLC (Limited Liability Company) offers taxation flexibility, which means the owner can choose to run the taxes through C corporation taxation or pass-through taxation. Pass-through taxation is when businesses don’t pay taxes on an entity level and the owners pay the business taxes on a personal level. S corporations have similar pass-through taxation as partnerships, but there are more restrictions on the shareholders, such as their numbers and the type of shareholders. Small businesses registered as C corporations are subject to double taxation, which is where the corporate income is taxed at both the shareholder and corporate levels.

Minimizing Liabilities

With any business endeavor, there’s a tax liability, which is the amount you’re responsible for reporting to the IRS. This liability is determined by your income amount and your tax rate. There are many ways a small business owner can minimize their tax liabilities. 

Pay For Health Insurance

According to the IRS website, if you’re self-employed and pay for health insurance for yourself, you’re likely eligible to claim a tax deduction. Self employed health insurance can potentially be fully deductible whether or not the individual itemizes or takes the standard deduction.

Incorporate The Businesses

If your small business is a sole proprietorship or other structure, it may make sense to switch to an LLC taxed as an S Corporation as that gives you more control over the earnings being subjected to FICA tax, which decreases your tax liability. Switching to an LLC also makes it easier to account for employee compensation and protects your personal assets in the event you take on business debts.

Start A Retirement Fund

If you haven’t done so already, another way to minimize your liabilities is to start a retirement fund. Not only does a retirement fund help you when you get older, but it can also help you now as you pay less in taxes. It doesn’t matter if the retirement plan is a simplified employee pension plan, or a simple IRA; they’re a great choice for your future and your present.

Maximizing Deductions

These aren’t the only tax strategies that small business owners can use, as there are deductions that many people forget about. If you work from home, you can claim a home office deduction if you meet the IRS eligibility requirements of using that space exclusively and regularly for your work. Other deductible expenses can include office supplies, rent, utilities, and more. If you use a vehicle for work purposes, you can deduct a portion of the vehicle expenses that are related to business use, either for actual expenses or mileage rates, which have their own set of rules. If you have employees, offering benefits such as health insurance also provides tax benefits.

We Make Things Easier

When it comes to taxes, it’s important to educate yourself about deductions, liabilities, and common tax pitfalls, but sometimes you need a helping hand to navigate the notoriously complicated state and federal tax systems. At Taurus CPA Solutions, we always have your best interests in mind, and we work with you to discuss your personal goals and learn about the various tax implications that apply to your unique situation. Contact our professionals today for a fully customized tax plan that’s perfect for you.