Running a small business can be rewarding and stressful at the same time. As a business owner, you have to be prepared to wear all the hats, all the time. One way to alleviate the stress of being an owner is to prepare yourself for the tax savings you can take advantage of during tax season. With that in mind, here are some rules to apply that will lessen your tax burden.
Start a savings account for health-related issues through the business
Too often the concept of getting a tax deduction on a health savings account doesn’t cross your mind. Any contribution to a health savings account is tax deductible, there are no limits to the amount of money contributed to the plan. Depending on the type of savings plan (individual or family) determines how much of the contribution is eligible for deductions. Funds from your health savings account can be used to pay for qualified medical expenses without being taxed.
Know your tax bracket
The more aware you are of your tax bracket, the more you will be able to accelerate income from year to year without placing yourself in a higher income bracket. The opposite of accelerating income from one year to the next is decelerating income for the purposes of maintaining a particular tax bracket. There are legalities involved with shifting income from year to year, be aware of these before you proceed. Maintaining a reasonable a tax income bracket is not impossible, it does take knowledge and practice.
Track your business expenses in every way possible
Business owners (self-employed tax payers) need to be very diligent in asking for, and receiving receipts for all manner of transactions related to their business. Buying lunch for the staff, taxi rides, gas for business vehicles and purchasing toner cartridges because you ran out at the office all have to be accounted for properly. Without a receipt, you will run into problems when filing. It may not seem like such a big deal, but the average small business owner will generate hundreds of these small expenses through the course of a normal year. They add up quickly. Think about getting a company credit card specific to these types of small expenses, credit cards make it even easier to track them.
Be smart when mixing business with pleasure
If you pay for plane tickets to attend a seminar (business-related) make sure the non-business related parts of that trip are excluded from business expenses. Going on a deep-sea fishing adventure with your buddies while attending that seminar can’t really be considered a tax deductible expense. It is always wise to practice caution, once the IRS catches you in one questionable business-related expense, they tend to get picky about everything else.
Get the most out of your vehicle and fuel deductions
The federal government allows two different types of vehicle related deductions. The standard method allows for 54 cents per business mile plus parking and tolls. The actual method adds up all vehicle-related expenses (oil change, car insurance, gas, car washes miles, repairs) which you then multiply by your business percentage. The formula is business miles by total miles for the year. You need to determine which of these deduction plans will work best for your company. As always, keep all vehicle- related receipts or use a company credit card to purchase these items. Bear in mind that driving from your house to work is not tax deductible.
A myriad of tax savings are available to the small business owner
There are multiple other ways to legally reduce tax burdens on a small business. There are as many tax deductions as there are pages they are printed on, literally thousands. Prepare yourself for a good tax season by knowing these deductions and how you can use them to your best advantage.