5 Ways Your Business Can Reduce Its Tax Burden

If you have a small to mid-sized business, you know how much taxes can eat into your profits and cut into your bottom line. From federal taxes to local ones, making a mistake or missing a deadline can set you back by a lot. It can even increase what taxes you already owe. When you’re a small business owner trying to make a profit, it can be frustrating to see a chunk of what you’ve earned taken out of each paycheck.

The kicker? Studies show that 93% of businesses have overpaid on their taxes. With over 70,000 pages in the federal tax code and other relevant legal documents, keeping up with all the taxes you have to pay can be a daunting task. With that in mind, how can a small business reduce their tax burden?

  1. Deducting home office and car expenses – Did you know that if you operate your business from your home, or you drive your car for business purposes, you can deduct expenses related to both? Many people don’t. The key is calculating what percentage of the time you use your car for business purposes. Look closely into what personal expenses are actually for your business. Remember that business use of property or part of your house must be entirely exclusive use for the business.
  2. Carryovers – Certain deductions and credits can be used in the next few years like home office deductions and capital losses. Make sure you keep track of the deductibles and credits you don’t use 100% of in a fiscal year.
  3. Decreasing your tax rate – An effective way of reducing your tax rate is to change your ordinary income tax to capital gains tax. Income tax is your personal income tax percentage based on your tax bracket. It’s the tax you pay on income earned from things like interest and wages. Capital gains tax, on the other hand, is the tax applied to the sale or exchange of assets. The capital gains tax tends to be a lower percentage than income tax.
  4. Traditional IRA – If you are self-employed, your taxable income can be reduced if you put some of it towards a traditional retirement account, like an IRA. That money isn’t taxed until you withdraw it after you retire.
  5. Changing the structure of the business – In some cases, it may be advisable that you change your sole proprietorship, partnership, or other entity into something else. Limited Liability Companies (LLCs), for example, can offer some tax breaks for your business. In some cases, you as the employer may not have to pay your taxes but still have to pay other kinds of taxes. It is important to note here that as great as that may sound, your situation is unique and you should not rely on your own research to change the structure of your business. Always hire an experienced Virginia business lawyer to at least guide you through the process because a small mistake can cause cumbersome delays or denials.

BONUS TIP: Hire family – An elderly parent or family member is likely taxed at a lower tax bracket, so their income will likely be taxed at a lower tax rate. This can add up when you’re trying to support them. Kids can also work for you and earn up to $6,000 without owing any income tax on it.

Contact Us

Are you seeking to find relief from, or decrease, your tax burdens? Attorney Jim Wilson is here to help. We know how frustrating it can be to see a chunk of your bottom line taken out each month or fiscal year. Together with an accountant or financial advisor, we can find ways to help you effectively lighten your tax load in the coming year. Please call the office today at 804-864-5268 or contact us here.

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Wilson Law Group

Jim Wilson is the founder and principal attorney of the Wilson Law Group. For the past 25 years he has been combining legal dexterity with an entrepreneurial mindset to help aspiring and established business owners start, finance, buy, sell, and run their companies.