How to Reduce Taxable Income for Your Small Business

In 2020, the U.S. government is projected to reap over $3 trillion in tax dollars. A significant portion of that revenue comes from small business owners — who might actually be paying more than their fair share. Do you know how to reduce taxable income and get a fair tax bill this year? 

Small business tax planning is a significant challenge. Whether you’re a sole proprietor or manage a team of people, saving up and paying taxes throughout the year can be daunting. However, once you know how to reduce business tax, calculating your taxes can become a money-saving opportunity.

While it’s important to pay all the taxes you owe, it’s dangerously easy to accidentally pay too much. Which tax savings are you missing out on? Let’s take a look at how to reduce taxable income for your small business.

Make Tax-Deductible Future Contributions

For many small business owners, saving for retirement gets pushed aside in favor of more pressing concerns. But what if you knew that contributing to a retirement account could help you save on your taxes?

If you set up a retirement plan for your employees, you can actually deduct the employer contributions from your taxes. You might even be able to qualify for a tax credit just for offering that plan. 

Look for tax-deferred plans, like employer-sponsored 401ks. No employees? No problem. Set up your own retirement plan with tax-deferred contributions, so you can deduct those amounts from your freelance taxes.

Upgrade Your Tracking System

How do you track your taxes? If you’re using an old, outdated, or paper-based system, you’re almost certainly missing out on some savings. Sometimes, saving on your taxes is as simple as buying new software.

If you don’t have records of your deductible business expenses, you could get punished in an audit. You can only deduct things that are properly recorded. The right software can automatically track those deductible expenses, creating a thorough record and saving your valuable time.

Look for a system that offers a digital way to track receipts, since receipt-tracking can be an especially challenging aspect of keeping records. 

Open a Health Savings Account

Healthcare can get incredibly expensive. A Health Savings Account is a great way to prepare for the unexpected — and it also allows you to take even more tax deductions.

Only certain health plans allow you to open a Health Savings Account, so you’ll first need to see if one is available with your plan. But if it is, you can save significantly on your taxes. 

You’ll contribute money before taxes, your contributions will grow tax-free, and if you need to take money out for medical expenses, you can usually do so tax-free, too.

This creates a great way to avoid paying taxes on a portion of your income while also planning for the future. While the IRS Fresh Start Program offers some forgiveness if you can’t pay your taxes, it’s far better to plan ahead than to find yourself needing to use your tax money to pay medical bills.

Defer Some Income

Deferring income into the next tax year is another way to save on your current tax bill. 

For example, around the holidays, consider delaying your bills to customers until January. Most customers will appreciate the chance to worry about paying once the holidays are over. But this tactic also benefits you, by pushing that income into the next tax year, so you won’t have to pay taxes on it for this year.

Similarly, if you have any business expenses, you might consider paying them while it’s still December. That way, you can deduct those expenses from your taxes this year, instead of having to wait. 

Use Business Property Wisely

If you have business property that you want to get rid of, selling it usually seems like the best option. However, there are times when it might be smarter for your taxes to abandon the property, rather than selling it.

This is best discussed with a tax professional, to make sure it’s the right choice for you. However, an abandoned property becomes a fully deductible loss, while a sold property is deductible under certain limitations. The fully-deductible option may prove to be your best choice.

Update Your Business Structure

Is your business structure the best for your tax situation?

If you haven’t changed your business structure in a while, it might be time to reevaluate. This is another situation where you should talk to a tax professional before changing anything. But for many small business owners, a change to your business structure can unveil new tax savings.

Offer New Employee Benefits

While giving your employees raises is an important part of doing business, there are times when it makes sense to add to benefits instead of giving a raise right away. This choice can also help you save on your taxes.

For example, you could offer an increased contribution to employee health insurance costs, instead of an equivalent raise. Your employees will still take home more money since they won’t have to pay so much for insurance. But you’ll save on your taxes, so you don’t have to pay employment taxes on these contributions.

Find New Travel Deductions

You can deduct business travel from your taxes. However, if you never travel for business, this deduction won’t do you much good.

It might be time to find a way to use this deduction opportunity. For example, if you wanted to travel for personal reasons, you might look for a way to mix business into the trip.

Now, your travel expenses are tax-deductible, and you can still take the vacation you were planning on. Just make sure you also had a justifiable business reason for the trip and documentation in case of an audit. 

So You Know How to Reduce Taxable Income: Now What?

Now that you know how to reduce taxable income for your business, what are the next steps?

While some of these tips can be done alone, we recommend finding a tax professional to work with before you do your taxes. They can help you find even more ways to save while helping to prevent an audit. 

Of course, taxes also aren’t the only way to save money. Why not stay on this path of savings and education? Come back regularly to our Money & Finance section for more smart saving tips!