Tax Planning For Business Owners

by Enid Kathambi, Money Columnist


Published in Money and Finance on 6th February, 2020


While individuals have up to April 15 to prepare, file, and pay their tax liabilities, businesses have to deal with tax issues all year round. It requires a lot of tax planning and knowing as many tax strategies as possible to help your business optimize its taxes.

Ultimately, the goal is to pay the least amount of tax as possible. But this has to be done legally to avoid facing tax evasion charges.

tax for business

We have some tax planning for business owners like you that will benefit you as you file year-end taxes and for this current year.

Types of business taxes

First, you need to be aware of the main types of federal taxes that impact your business. These are:

Income tax

All business types, except partnerships, must file their income taxes every year. Businesses that pay estimated taxes can pay their tax liabilities when filing their annual federal tax returns.

However, if your business uses the withholding tax method, then it should pay taxes as it earns the income. The amount of income tax that your business will pay will depend on the gross profits of the business for that period and the type of business.

Employment tax

As an employer, you must contribute and pay the equivalent of your employees' contribution for Social Security tax and Medicare tax.

employment tax

When paying for these, the business will file and remit both the employees and the employer's contributions. Employment tax also covers federal unemployment tax (FUTA) and federal income tax withholding for the employees. The company bears FUTA.

Self-employment tax

Self-employed individuals pay employer portion for Social Security and Medicare taxes. The total rate is 15.3%, where 12.4% covers social security, and 2.9% covers Medicare taxes.

Excise tax

Excise taxes apply to specific types of businesses. It all depends on what the business manufactures, sells, how it operates if the business receives payments for certain types of services or even the kind of products or equipment the business uses.

Additionally, as a business owner, you should check with your state's government to confirm other additional taxes that will apply.

Some states will still charge your business income tax and employment tax, and these rates from one state to the other. These include:

Sales tax

It arises for the sale of services or goods by any business. If you are collecting sales tax from your business's sales, you must ensure you have filed and paid this tax to the state government. The rates for sales tax will vary between states.

sales tax

Property tax

This is for businesses that own real properties like real estate. These rates will also vary between states. The amount you pay will solely depend on the value of the property. The higher the value, the higher the property tax.

Tax planning strategies for business owners

  • Beware of tax deductions to claim

Many business owners rarely have an idea of what deductions they can claim when filing business taxes. Some of the most common expenses you can use include:

  • Cell phone expenses, when the phone is primarily used to conduct the company's business
  • Mileage and expenses for personal vehicles used for business purposes
  • Costs for purchasing business equipment like computers, phones, monitors, and printers
  • If you are operating the business from home, you can claim expenses like part of the interest for a mortgage, depreciation of the business space, home insurance costs, security costs, utilities, rent, repairs and cleaning costs
  • 50% of entertainment and meal expenses for existing or potential employees, partners, clients, and contractors
  • Retirement plan contributions and setting up costs
  • Miscellaneous deductions like ATM fees for your business, newspapers bought for the business, and out of town business travel expenses
  • Charity donations
  • Be smart about your business investments and purchases

Planning when to make a significant business purchase is very important since it will have an impact on your business's tax liability.

Accelerate payments for purchases to be made close to the year is about to end. This way, you can claim a tax deduction on the expenses in the current year.

tax plannning

For investments, look out for opportunities that have friendly tax impacts on your business's tax liability. For example, investing in areas like gas, oil, and real estate allows you to write off a significant part of the initial cost.

This will significantly reduce your company's taxable income, thus lowering the tax liability.

Remember to claim tax credits

After including all the tax deductions, remember to utilize tax credits to reduce your business's tax liabilities.

These will directly reduce the tax liability of your business after factoring in all deductions. These credits include but are not limited to:

Child care expenses tax credit

Does your business pay expenses for the child for any employee? Well, good for you as it also grants you a chance to claim child care credit.

You can claim 25% of the expenses with a limit of $150,000 in a year. Also, this might offer a better deal for you than claiming your child's care credit on your individual return.

Work opportunity tax credit

Not all businesses are eligible to claim this credit, but you can confirm if your business qualifies here. It is mostly available to businesses with disabled employees, veterans, and other disenfranchised.

Work opportunity credits vary. However, a business can receive up to 40% of the first $6,000 of wages paid to a qualifying employee.

Health care tax credit

Again, not all businesses qualify for this tax credit. Your tax advisor or a CPA professional will be in a better position to advise on whether your business qualifies for this credit.

Generally, it applies to businesses with less than 25 employees employed on a full-time basis. The business must have an average of $50,000 and below per year as expenses for salaries. Additionally, the business needs to be catering for at least half of the employees' health care premiums.

health care tax credit

In case your business qualifies for more tax credits than it should legally claim, you can carry forward the balance and utilize it in the following year's tax.

Alternatively, you can also apply the tax credit to the tax returns of the previous years, and that did not surpass the credit limit. In this case, you can apply for a retroactive refund.

Some states also offer tax credits to businesses in a bid to increase investments and economic growth.

Also, most states offer these tax credits to businesses that use local resources, increase the rate of employment in the state, and operate in undeveloped parts of the state.

There are no specific rates or amounts for these credits, and they vary from one state to the other. For more information on your state's tax credits, you can visit their chamber of commerce or the treasury department.

References

https://www.rinawealth.com/products-services/tax-planning-business-owners

https://www.thebalance.com/tax-filing-strategies-for-small-business-3861400

https://www.businessnewsdaily.com/767-small-business-tax-tips.html

https://www.irs.gov/businesses/small-businesses-self-employed/irs-tax-calendar-for-businesses-and-self-employed

https://www.irs.gov/businesses/small-businesses-self-employed/filing-and-paying-your-business-taxes

https://www.irs.gov/businesses/small-businesses-self-employed

https://smallbusiness.chron.com/types-business-taxes-17187.html

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