Five Tax-Saving Ideas for Small Business Owners

Most small business owners complain that they pay too much in taxes. Yet reducing what they pay is often as easy as taking advantage of the benefits to which they are entitled. If you are among those owners who find tax breaks hard to come by, here are five ideas that could reduce your tax bill:

1. Contribute to a retirement plan.Tax-deferred retirement plan contributions not only help you save for a comfortable retirement, but they also reduce the amount of current taxes you pay. If you haven’t already done so, consider establishing a Keogh, SEP, or SIMPLE plan.

Keep in mind that if your tax year has already closed and you didn’t set up a Keogh or SIMPLE plan, you may want to consider a SEP which allows you to establish and contribute until the due date of your return (including extensions) for the prior year. For example, if you received a four-month filing extension from April 15, you can set up and fund a SEP as late as August 15, 1998, and use the deduction for 1997.

By consulting with a financial advisor you can learn the features and benefits of various retirement plans and choose the one that best meets the needs of your business.

2. Keep detailed business records.It’s a good rule of thumb to maintain business records for at least three years filing your tax return. You’ll also want to keep detailed depreciation records for the entire time you own business equipment or property. That way, in addition to figuring out your current-year depreciation, you can also determine your cost basis when you sell or dispose of the items.

If you are an astute record keeper and have saved all your business mileage receipts, you could benefit from using the actual expense deduction for your automobile. If not, you might be better off using the standard mileage rate. In either case, be sure to track the date, mileage and purpose of your car use. You accountant can help you determine the method that gives you the greatest deduction of you are unable to use either method.

Even though the IRS does not require you to keep receipts for business travel and entertainment expenses less that $75 (except lodging receipts which are always required), you need records to substantiate you’re your deductions. When tax time comes, you are less likely to miss legitimate deductions if you record expenses in a day planner or daily log.

3. Employ family members. By hiring family members, you may be able to shift income to those in lower tax brackets (as long as they provide bona fide services to the business). You can also avoid the employer share of FICA on wages paid to your children under age 18.

If you spouse is an employee, you may be able to set up a fully deductible health insurance plan. Since most plans cover employees and their spouses, you would benefit from coverage under the plan while enjoying the tax deductibility.

4. Examine your business structure. How you decide to organize your business can have a significant effect on the taxes you pay. By structuring your business as a pass-through or S-corporation you are only required to pay the employer share of FICA taxes on what you take as salary. With S-corporations a percentage of your earnings can pass through the corporation to you as dividends, thus reducing your FICA-eligible wages.

Tax and other benefits of various structures can vary from business to business. A qualified financial advisor can help you determine the most effective way to organize your business.

5. Review special estate tax treatment for family owned businesses. As of January 1, 1998, certain family-owned businesses can receive special estate tax considerations. If your family owned farm or business makes up more than 50 percent of your estate, you can get a special exclusion from estate tax. Up to $1.3 million, including the amount of the unified credit equivalent amount ($625,000 in 1998), may pass to heirs estate-tax free.

Keep in mind that there are certain caveats for participation in the business that both you and your descendant must meet to be eligible for this exclusion. Since this is a complex topic, it’s best to consult your attorney and CPA for clarification on how this new law might affect you.

The taxes you pay have a tremendous impact on the profitability of your business. That's why it's important to consult professionals who can help you get the most from your deductions and assist you in planning for the future.

source : SBA

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