As certified public accountants, people inquire daily with Owolabi Salis and his colleagues about effective business tax strategies. Implementing the most effective tax strategies is especially important for small businesses. For small business owners, taxes can be a significant burden. However, it’s possible to alleviate part of this burden with a few highly effective strategies.
Strategies focused on such alleviation are also about maximizing revenue in many cases. By minimizing taxes and maximizing revenue, new business owners, in particular, can look forward to greater profitability from the outset. With that comes long-term financial stability.
The following is a closer look at half a dozen of the most effective tax strategies for small business owners in 2023. It’s a closer look that starts with tax-exempt staff benefits.
Implement Tax-Exempt Staff Benefits
Wages are on the increase, which is fantastic news for workers. However, this causes additional tax expenses for all businesses and their owners. It’s a reality that’s felt the most by smaller employers. Thankfully, effective tax strategies exist to reduce some of the impacts on small business owners.
Among the most effective strategies center around tax-exempt employee benefits. Also known as fringe benefits, they’re a part of your staff’s compensation packages. Tax-exempt fringe benefits can range from all-important medical insurance to assistance with child care or contributions toward ongoing education.
Don’t Let Missed Tax Deductions Go to Waste
Owolabi Salis notes that small business owners often miss out on various tax credits, deductions, and other savings for one reason or another. Furthermore, many fail to realize that these can often carry over from one year to the next.
Small business owners may be unable to benefit from one or more available tax credits or deductions in a particular year. Where that’s the case, they should take the necessary steps to carry them forward wherever possible. Business owners can then benefit from any missed savings—including general business credits—during the subsequent tax year.
Minimize Tax Burden With a Deferral
Especially as a new business owner, your first year’s taxes can feel like a huge liability. As your business begins to flourish, increased tax liability may lead you to explore tax planning for the first time. Among the most valuable tax planning strategies at this stage involves deferring part of your income.
This approach minimizes the tax owed during a given year but doesn’t eliminate it. Instead, it allows small businesses to grow and save money simultaneously. Any deferred taxes get settled the following year.
Take a Year-Round Approach to Taxes
Opportunities exist to manage your taxes and tax strategies year-round. Especially as a new or small business owner, it’s vital not to forget this. Above all else, employing a year-round approach to taxes takes some of the stress off of the owners of businesses of all shapes and sizes during tax season.
Use this year-round approach to explore adjusted gross income, tax deductions, and other strategies focused on keeping a business in the lowest possible tax bracket. Itemized deductions are a great place to start, including accounting for charitable contributions.
The benefits are invariably plentiful. According to Owolabi M. Salis, effectively managing tax deductions and lowering a business’s adjusted gross income also has other perks. As a business owner, these perks can include access to various tax credits and exemptions from additional expenses like the Medicare surtax.
Structure Your Business Correctly
All too often, new and more established businesses continue to operate using entity structures that may not be optimal. That’s why it’s imperative to double-check that your business is correctly structured.
Failure to do so can result in massively reduced tax efficiency. Should your business be a limited liability company, a partnership, or an S corporation? Or should you still be trading as a sole proprietor? A tax professional can help you to decide if you’re unsure. Alternatively, you can refer to the government’s Internal Revenue Service website.
Different entity structures come with distinct pros and cons. However, failure to adopt the most appropriate option will almost always have adverse tax efficiency implications. As a rule, these implications far outweigh the perks of an entity structure not best suited to a particular business.
Don’t Fall Victim to Additional Taxes
And last but by no means least, ensure that you adopt the right small business tax strategies to prevent falling victim to additional, unexpected taxes. These usually come as the result of a tax audit from the Internal Revenue Service.
To avoid additional taxes—and other penalties—ensure that your accounts are up-to-date and correct. Too many miscellaneous deductions, incorrectly estimated business mileage, and more can all result in surprises following a tax audit.
With that, don’t try to oversimplify or save too much time on accounting. Wrongly classifying employees can also lead to significant back taxes and further penalties. Thankfully, with appropriate tax strategies in place, pitfalls such as these are easily avoided, mitigating much of the risk of additional tax burdens for small business owners across the board.
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