Tips for small businesses to maximize tax credits
by Barsha Bhattacharya Loans & Credit 18 August 2023
Tax filing is undoubtedly a complicated procedure, especially if you run a small business. A small business in the U.S. may be required to pay as much as 19.8[Ma1] % on average as taxes each year. This value can differ greatly as small corporations are taxed at 26.9%, small partnerships at 23.6%, and a sole proprietorship at 13.3%. Either way, besides the complexity of calculating taxes, a significant chunk of revenue is paid to the government.
For many businesses that are still trying to find solid footing and ensure sustainability, the amounts can be a concern. Fortunately, though, there are several tax credits and deductions that a small business can take advantage of. Not all of these apply to every other company, but since most are unaware that these provisions exist, exploring more about them is imperative. In this article, we look at not just helpful tax tips but also outline some of the deductions that are currently available.
Strategic Tax Tips For Small Businesses
Starting off with the basics, it is important to have a strong system for tax filing. The only way to build a proper operational cycle in this regard is by following certain fundamental rules and guidelines. Here are some of them:
Tax Filing Is Not A Once-In-A-Year Exercise
Most small businesses treat tax filing as something they have to perform once a year. This means that they only begin to gather documents, receipts, and other relevant paperwork when the deadline is approaching. That is one of the biggest and most basic mistakes that can lead to numerous delays and even result in a larger tax bill than usual.
Staying organized throughout the year is, therefore, critical. For instance, you need to be aware if you need Form 8881 for the Startup Tax Credit, which is an application for reimbursement in cases where a fresh business venture starts a retirement plan for an employee or initiates an auto-enrolment option for them. Nonetheless, here are some tips for organizing your tax filing and record-keeping activities:
- Start with a designated filing system: Even though paper copies are going out of trend, they are still important, and businesses use them occasionally. Nevertheless, whether your business stores digital or physical documents, it is important to have a separate system for relevant paperwork that will be used during the tax filing process,
- Be aware of federal and local document retention policies: The regional, state, and federal requirements for retention of crucial business documents, like employee background checks and licenses, etc., can vary. It is vital to be aware of the relevant requirements in this regard and have a system in place to retain all documents for the specified time period in an immaculate manner,
- Have backups: Both physical and digital documents are susceptible to various types of damage. Therefore, it is always best to have backups for each type of document. Storing copies of all documents in separate places is helpful in both cases. Also, scanning physical documents for storage helps.
1. Get Professional Help Where Necessary
Tax filing may not be a walk in the park, and if you don’t come from a finance background, you can slip up and make costly mistakes. Therefore, getting in touch with an expert to handle the matter for you is beneficial. Make sure that you are hiring a reputable individual or company because falling for a scam can have major consequences. The benefit of working with a professional is that they are aware of details like applicable deductions and credits that you can avail of and either lower your taxable income or get refunds for various provisions.
2. Read And Research Applicable Tax Credits
The IRS is quite generous in certain areas, offering significant refunds, deduction possibilities, and credit to qualified businesses. There are certain credits that apply to every business but others have specific requirements which only become applicable under specific conditions. In general, there are credit regulations that can apply to:
- Personal vehicles being used for business purposes,
- A home that is being used for office work,
- Certain insurance premium payments,
- Office equipment and supplies,
- Unavoidable business travel, entertainment events, and meals,
- Resources utilized for tax preparation and filing even.
Tax Deductions For Small Businesses
Although there is a difference between tax credits and deductions, they ultimately provide the same outcome: saving the amount submitted as taxes. Here are some examples of tax deductions that business owners can take advantage of:
1. Health Reimbursement Arrangements (Hra)
Businesses that offer healthcare plans to their employees can claim a variety of deductions on these services. For instance, the HRA is a provision where the IRS allows any medical expenses that the business made for its employees out of its own pocket can be deducted from their taxable income. On top of that, there are Health Savings Accounts (HSA) that employers can offer to staff as perks and avail tax relief on them at the same time.
2. Federal R&D (Research And Development) Tax Credit
A tax credit applies to businesses that participate in any type of R&D for their customers. Of course, certain conditions need to be fulfilled in order to qualify, but most sole proprietorships, partnerships, and non-publicly traded companies can explore this option. This tax credit option can allow a small business to enhance cash flow and reduce liabilities in terms of taxes at the same time.
3. Bonus Depreciation
A pertinent provision, at least in the present tax regime, allows any expenditures made on purchasing fixed assets for business use to be eligible for a bonus depreciation tax credit. This means that a small business can even go out and buy a helicopter or a private plane, and as long as it is truly for business use, the entire cost can be completely deducted from your taxable income. This deduction is one that most business owners are unaware of. For more tax deductions, you can go through this article and see which ones your business can qualify for.
Conclusion
Tax credits and deductions are a vital part of a small business maintaining healthy revenues and ensuring operations become sustainable. Business owners that remain unaware of these provisions can pay significantly more in taxes each year. Always consult with a specialist tax advisor when crafting your business’s tax filing strategy. Lastly, make sure to keep accurate and up-to-date records of all your business’s financial activities.
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